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There’s two common kinds of auction those with multiple rounds where the final bid wins and those where everyone puts in the maximum amount upfront and the winner pays whatever #2 bid. The second type is much faster but incentivizes the auction house to lie about the #2 bid.

Google did the second type and then got caught lying about bids. Doing so is really tempting but also generally fraud.

In adtech a first price auction is also a single round.

Winner pays what #2 bid + a penny more correct? (Similar to eBay, when done correctly)

It's unclear why a penny is considered the legal adder, why not 15% more? If this is all disclosed in Google's terms of service, is it really fraud?

No, precisely as they said: winner pays the second place bid.

E2a: https://en.m.wikipedia.org/wiki/Generalized_second-price_auc...

Edit again - I stand corrected, while it is true that the standard implementation is as I said, seems from TFA Google’s implementation is second-place+0.01.

They disclose its second place + 0.01, but the article says they lied and raised it by 15%.

“Google’s advertising auctions require the winner to pay only a penny more than the runner-up. In 2016, the company discovered that the runner-up had often bid only 80% of the winner’s offer. To help eliminate that 20% between the runner-up and what the winner was willing to pay, Google gave the second-place bidder a built-in handicap to make their offer more competitive, Whinston said, citing internal emails and sealed testimony by Google finance executive Jerry Dischler earlier in the case.”

“Google gave the second-place bidder a built-in handicap to make their offer more competitive” is the tamest way of phrasing it, given that the “handicap”’s only effect is to cost the first-place bidder more money.

It never helps the second-place bidder. I’d argue “handicap” is deceitful.

But according to the article it was not disclosed (??)

> Google’s advertising auctions require the winner to pay only a penny more than the runner-up.

> “Google has not been transparent about what they are doing” with pricing, Whinston said.

Correct way: Winner bids $1.00, 2nd Place bids $0.80, Winner pays $0.81

New way: Winner bids $1.00, 2nd place bids $0.80, Google adds 15%* markup to 2nd bid, Winner pays $0.93.

*used as example, not a verified number

Ahh okay, the missing piece is that the winner pays the second-highest bid, plus a penny. I can definitely see how this would be fraud, and how it could be justified internally by Google as "it's still less than they bid".

I'm not understanding this, how can it be fraud? (Genuine question, I'm not insinuating anything.)

I don’t think the point is that it’s fraudulent, remember that this is in the context of the antitrust trial. I think the point here is that they could only do that since they have a monopoly.

Though I’m not sure I even agree with that. It burns advertiser’s goodwill for sure, but they advertise on Google because it provides them with a ROI, not because there is no where else. This just forces them to tweak their bids more.

That’s without weighing in on whether Google has an illegal monopoly on search

Something can be both fraudulent and an antitrust issue. In fact there is probably a specific type of fraud which is just this (at least in the UK), which is "Fraud by abuse of position"

The UK legal definition of this would be met if a person/company:

1. occupies a position in which he was expected to safeguard, or not to act against, the financial interests of another person (e.g. operates an auction to tender their online marketing spend?)

2. abused that position (e.g. by putting in fake bids, which only they could do because of their position?)

3. dishonestly (e.g. intentionally failed to disclose or was otherwise intentionally dishonest)

4. intending by that abuse to make a gain/cause a loss (e.g. they intended to raise profits)

The abuse may consist of an omission rather than an act (e.g. number 3 can be a failure to disclose).

I meant that if they claimed that the winner would pay the runner-up bid plus a penny, and then the winner actually paid the runner-up bid plus a percentage, plus a penny, then that would be fraudulent (assuming it was not disclosed).

The allegation is that Google profited from lying, which is the definition of fraud. They stole, by making someone pay more than they otherwise would have, through deception. If the deal was “you pay what you bid” then this would be fine, but that was not the deal.(To be clear, I have no idea what the deal was, I’m just explaining the OP)

Exactly this. You can end up with some weird situations. I saw one guy get a criminal conviction for this: he repaired elevators. He left RepairCorp where he worked and set up on his own. BuildingCorp continued to pay him for their repairs not realizing it wasn't RepairCorp. In the trial they stated that they were always very happy with his work and the price was identical to RepairCorp. They were pissed he had lied to them though, and the guy ended up getting convicted for fraud.

I'm aware of what fraud is, I just didn't understand based on the parent comments what fraud was being committed (what lies were told, etc). I didn't pick up on the fact that Google was advertising paying the runner-up bid plus a penny but then marking up the runner-up bid substantially.

But that's not what the witness expert claims. He said "squashing".

Google used a second price auction, and also it ranked ads in the auction by bid multiplied by click through rate. Squashing is something like ranking ads by (bid * power(ctr, gamma)) where 0 < gamma < 1. In auctions where the 3rd bid (or lower) wins under the (bid * ctr) rank switching to squashing may increase revenue, because the actually higher bid will win the auction.

I have the same question too, say on ebay if I bid for something for a $1.00 but the second highest bidder was $.80, would i pay the $1.00 or $.80? (Its been a long long time I used ebay or did any bidding)

You'd pay $.80 plus minimum overbid amount - so $.81 or $0.85 or sth like that.

From memory, $1 is your maximum bid, your actual cost would be $.81 (or whatever the increment is over 2nd place).

Winner expects to pay runner-up bid (this is a very important piece, because this changes the behaviour of bidders). Google quotes them an incorrect bid in order to collect more.

Ahhh okay, that's the part I was missing. Thanks.

> New way: Winner bids $1.00, 2nd place bids $0.80, Google adds 15%* markup to 2nd bid, Winner pays $0.93.

This is true. But the story gets crazier. Let's say that CorpA and CorpB are both bidding on the term "Valuable Widgets". Here is who it goes:

CorpA bids $0.80

CorpB bids $1.00

--

CorpB wins the auction, pays $0.80 + 15% = $0.92

--

CorpA is sad they lost and wants so they try to outbid. They must pay $1.00 + 15% or $1.15

CorpA wins the new action, paying $1.15

--

CorpB needs those auctions to sell more widgets, so they now must pay $1.15 + 15% or $1.32

It obviously goes back and forth, but as you can see, Google is widening the gap each time to escalate the bid up faster. It increases competition and raises prices. In order to win you can't just pay what the previous person paid, you must pay a premium of 15%.

Now the part that is unclear is what happens if you ignore the winning bid price. So if CorpA has a max bid of $1.00 and CorpB tries to bid, they will see that they need to bid $1.15 to win the bid, because Google is saying that is what is needed to win the auction, but if CorpB only bids $1.10 they should still win the auction at $1.10 since that is their max bid and CorpA is only willing to pay $1.00. So CorpB in this case would pay their max bid and win. But either way, google is artificially pushing the price up higher than it technically needs to be.

That doesn't sound right. If the loser can see what the winner bid, they'd just need to bid for $1.01 next time to win. They'll get charged $1.15, but their bid will be $1.01, which means the loser next round will see that that was the winning bid and they'll know to bid for $1.02, and so on.

Since almost every comment is missing the nature of the change and its effects, let me put it in a clearer way:

Google stated that they were holding naive second price (with an asterisk) auctions and moved on to holding more optimal auctions. Optimal auctions are the ones where you set reserve prices and assign handicaps to each individual buyer to make the auction more competitive and yield higher revenue, like Google has done. (How to calculate optimal reserve prices and handicaps is left to reader, should be fairly trivial because economics is not a real science.) So, in effect Google has increased advertising prices without communicating the fact, in a way that the participants could also attribute the cost increase to changing marketing landscape. The fact that Google expected 15% more revenue puts them over the standard 5% test for significant market power, and hiding the price hike is easy evidence for the abuse of such power.

How much of this ties to enhanced CPC bidding (enabled by default, pushed by account reps as a must have)? It allows your bids to exceed your maximum CPC in scenarios that Google defines-- which, so it seems, are likely scenarios that Google views as having profits left on the table.

Enhanced cpc is a lot more than 15%, but they was my original thought as well

Since I've been in the Google meetings where experiments like this are discussed:

It's heavily mathematical. I pity any government lawyer who has to make it understandable to a non-technical audience.

The heavily mathematical part is the proof that goes with the justification for the bidding system. Explaining the merits of the auction or explaining what the fraud is is pretty easy.

Professor Whinston didn't work at Google, did he? He just makes his opinion based on some emails found in the discovery?

For all we know, it is equally plausible that Google at some point launched a new prediction model, and in a traffic experiment it showed up the following stats: increase on campaign average cpc price, decrease on average auction discount (or whatever the metric for the gap to 2nd bid is called), and no harm to conversion cost. Team manager reported the metrics highlights to their higher ups. Emails found in discovery... ends with guys on HN throwing fraud accusations, pretty easy.

That person is an expert witness. He's there to explain to non-experts the meaning of what's been found in discovery. What he's saying to the court has likely been vetted by the prosecution.

If your claim is that the prosecution is making up wild shit, then Google's attorneys should have a field day rebutting it.

This doesn't happen very often.

This trial is antitrust, not fraud, so Google lawyers will be rebutting it only to the point it helps them. And they will try to keep it sealed anyways. Since it doesn't seem that either party is willing to describe the auction algorithmically, we may never get to learn it, apart from reading Albert Cory substack

In particular, the linked article mentions 'squashing', and a quick research finds https://www.theregister.com/2010/09/16/yahoo_does_squashing/ where it is mentioned that ads are ranked not by bids, but rather by "bid multiplied by click probability".

In the ideal world, the first question to the auction expert should be "what price is charged, if due to click probability, the second bid ad wins the auction?" and the follow ups would be "but surely, the price charged isn't higher than the bid, or else the advertisers would notice that?" and "supposing the third bid ad wins due to the click probability, how would disabling that multiplying by click probability affect google revenue?"

Surely you just give an example of an expected payment and then the price Google asked? Show it was 15% (give it take a cent) over.

Google earned £150B pa (say?) and so a pecuniary fine of £39B per year should be levied (twice the extra).