In our class, we had discussed the mechanism of the second price or the Vickrey auction and how the dominant strategy for each bidder was to bid the true value that the he has for the object. One feature about the second price auctions we talked about was that there was only one round of bidding. Secondly, the objects that were being auctioned were non-perishable. Thirdly, we knew the “number” of objects that were being sold during the auction. So you must be wondering why exactly am I talking about these seemingly unimportant points in these auctions! The reason is that these are not always the cases in real world. Take for example, the case of search engines like Yahoo and Google allocating positions to advertisers on their pages.

Since the search engines can only show a limited number of ads each time a user enters a keyword, they need to sell these positions to the advertisers and something like second price auctions seems to be the right thing to do. These search engines use mechanisms based GSP (Generalized second price) auctions to sell these ad positions as opposed to the Vickrey-Clarke-Groves (VCG) mechanism. In the simplest GSP auction, for each keyword, advertisers submit the prices they are willing to pay. The bidder with the maximum value gets the position on the top and he pays the price of the bidder who got the position below him. Thus, a bidder which won the position i pays the cost bid by the bidder of the position i+1 . Even though the multiple positions available generalize second price auction, unlike VCG, bidding the true price is not the dominant strategy in GSP.

The main factors that set bidding using VCG apart from bidding using GSP are that while bidding for keywords, you are actually playing infinite rounds of bids. And thus you could change your bids based on the bids of other bidders in the previous rounds. Also, the search engines are effectively selling perishable items because if they don’t have an ad for a particular period of time, they are actually losing money. And not just that, even after bidding, since the policy is pay per click, the bidders don’t know exactly how many(much) things till after the bidding has been done and some number of users have clicked on their ads. Using all these factors, we can prove how bidding the true price does not remain the dominant strategy in this business. For an in-depth proof, please read

http://www.benedelman.org/publications/gsp-060801.pdf