Facebook ran a VCG ad auction, pricing by displaced value, so advertisers can't game it

John Hegeman, whom WIRED calls Facebook's chief economist, joined in 2007 and helped build its ad auction. Where Google uses a generalized second-price auction, Facebook used the Vickrey-Clarke-Groves mechanism, a 1960s-70s design that had mostly stayed academic. It prices each ad by how much value is displaced from everyone else if it wins the spot.

In theory, advertisers can only succeed by bidding what the placement is truly worth to them, so they cannot game the auction. The auction also factors in relevance, using signals such as hidden ads and the quality of an advertiser's past ads, and lowers prices for advertisers who make good, relevant ads.

With News Feed ads from 2012, Facebook extended the auction so ads compete against the most relevant organic content, balancing ad against post. The stated goal is showing people what they want to see, which executives say maximizes long-term revenue, not short-term revenue.

Use a VCG auction: charge each ad for the value it displaces, so bidding truthfully is the best strategy.

Gaming wastes advertiser effort and reduces confidence in the auction.

Pricing by displaced value makes the winner the truly most relevant ad.

Quality ads get discounts, so advertisers improve targeting.

Executives believe that if advertisers get returns they spend more.

A mechanism that removes the payoff from gaming lets participants spend their effort on quality, which is what the platform actually wants.

WIRED reported in 2015 that Google researchers had said Google also now used VCG in ad systems beyond search. Facebook pulled in $4.04 billion in Q2 2015. The article cautions the system is a black box, advertisers may not understand it, and its anti-gaming effect is partly theory; a marketing professor said even belief that it's un-gameable has value.