Scott Spenser, Google’s product manager in 2010, was interviewed on the use of “second-price” auctions in the online ad auction world. Spencer had described what “second-price” auctions were and why they “minimize the need to ‘game’ the system”. “Second-price” auctions are when the person with the highest bid on an ad spot or item only pays the price of the second highest bid which encourages those who bid to only bid what the spot or item is actually worth rather than over bidding. This tactic lowers the need to create the bidding into a game and saves millions of dollars. However Google has been accused of gaming this particular system themselves.
The attorney general of Texas named Ken Paxton led a lawsuit against Google which was released unredacted by a federal judge in 2020. This lawsuit was eye opening into the tactics that Google had used to mislead advertisers and how they had manipulated the ad game to their own benefit with inside information for auctions before they took place.
Google is facing many lawsuits but one in particular outlines how they have full control over many associations within the online auction world such as owning the largest ad exchange, buyer and publisher platforms in the game. This makes Google the puppet master in a sense as they own both the buying and selling of these ads in the auction which in turn, creates a conflict of interest on their end. This lawsuit goes on to accuse Google of manipulating the second-price tactic to more of a third price pay and pocketing the remaining amount. This is done by three programs that were secretly run, the first called Project Bernanke launched in 2013 named after Ben Bernanke, the former Federal Reserve Chair. The way it works is if there is an initial bid, the buyer would pay Google the second highest bid, but would pay the publisher the third highest, allowing them to pocket the rest of the money in what they call the “Bernanke pool” and investing it in their ad buying programs. The program however would also use that money to increase the bid prices, whereas if it were held through a different corporation, they would be significantly lower priced. Google had released a statement, however, denying all claims that they were running a third price auction saying that the allegations are “inaccurate”.
The second program that was run through Google’s ad auctions was called Dynamic Revenue Share. This program allegedly allows Google to take a look at all the bids taking place, as they own both sides, and would adjust their commission rate, the percentage taken from each bid with this program, manipulating the auction in their favor every time. This is great for Google, as the amount the final bid was paid is never disclosed, so Google can take any amount and go undetected.
Another program used in ad actioning, called Reverve Price Optimization, gives more insight into how Google is manipulating the game to their benefit. This program sets a minimum payment known as the “floor” bid for each impression and if the “floor” bid were to be a higher price than the “second-price” bid, the buyer would pay for the “floor” price. What Google has allegedly been doing is finding out the purchase history of the buyers and raising the “floor” bid up to what they typically pay in an ad auction, pinching every penny out of each buyer to their gain. Within the lawsuit, it outlines that Google gained an additional annual revenue of about $250 million.
In this lawsuit, many former Google employees attested to the fact that it is an unfair game Google is playing and it will not be good for either side in the long run. Google has made statements denying all of the claims within the complaints saying that the lawsuit is “full of inaccuracies and lacks legal merit”. All of these programs outlined paints a picture that this is really Google’s world, and the online ad market is just living in it; however, Google will have to put up a very strong argument with the judge and jury to prove otherwise.