Google’s New Auction Formula Raises Prices and Earnings in Antitrust Case
Alphabet’s Google has come under scrutiny as its revised advertising auction formula in 2017 reportedly led to a 15% increase in prices and generated billions of dollars in additional revenue. This revelation was recently unveiled by an economist testifying for the US Justice Department in the ongoing antitrust case against the tech giant.
Michael Whinston, an economics professor at the Massachusetts Institute of Technology, shed light on how Google modified the way it sold text ads through a project dubbed Project Momiji. This project aimed to enhance the company’s revenue by manipulating bidding prices. By adjusting the auction rules, Google aimed to increase prices against the highest bidder, according to Whinston’s testimony on Friday in a federal court in Washington.
Google’s advertising auctions previously required the winner to pay just a penny more than the runner-up. In 2016, Google discovered that the runner-up had often bid only 80% of the winner’s offer. To address this issue, Google provided the second-place bidder with a built-in handicap, making their offer more competitive. Internal emails and sealed testimony from Google finance executive Jerry Dischler supported Whinston’s statements in court.
Highlighting Google’s monopoly over online advertising, Whinston argued that it is important not to view these auctions simply as competitions but rather as races being run by advertisers under Google’s predetermined rules. This control over the rules gives Google significant leverage in the market.
The examination of Google’s auction formula also revealed its various deals with companies such as Apple and Samsung Electronics. Google pays these companies a share of the revenue generated from search advertising, contributing to its dominance in the advertising sector.
Over 60% of Google’s total revenue, amounting to more than $100 billion in 2020, comes from search ads. The company has witnessed steady annual growth in search ad revenue since 2012. In order to meet revenue targets, Dischler admitted that Google occasionally made adjustments to its advertising auctions. One significant technique, known as squashing, aimed to make the runner-up’s bid more competitive. Google predicted that this tactic, along with charging higher prices for ads that used more words, would boost revenues by 15%.
Although Google has not been fully transparent about its pricing strategies, Whinston believes that advertisers can still uncover these practices to some extent. Advertisers have alternative mechanisms at their disposal to stay informed about Google’s pricing methods, even if the exact details remain shrouded.
As the antitrust case against Google unfolds, these revelations shed light on how Google has fine-tuned its auction rules to strengthen its market position while potentially impacting advertisers and increasing its own earnings. Critics argue that this lack of transparency underscores the company’s monopolistic control in the online advertising realm.
In conclusion, the ongoing antitrust case against Google has led to the disclosure of the company’s revised advertising auction formula, which resulted in higher prices and increased profits. By modifying the rules, Google aimed to extract higher bids and secure its dominant position. The implications of such practices will likely shape the outcome of the case and potentially influence the future landscape of online advertising.
