It is said that when James Tobin won the Nobel Prize in Economics in 1981, journalists asked him what he had won the prize for. Professor Tobin began to draw equations and try to explain how the variables connect to each other. The journalists were frustrated and asked Tobin to explain again in slightly simpler words. "All right," replied Professor Tobin. "It's kind of like not putting all your eggs in one basket." The next day, newspaper readers around the world were informed that Professor Tobin had won the Nobel Prize for discovering that it was better not to put all one's eggs in one basket. The truth is, it's easy enough to understand the journalists. It's a little harder to understand equations. But it's worthwhile understanding why Professor Paul Milgram won the Nobel Prize this year; because the insights drawn from his research are the key to understanding a large part of the profit made by internet giants. In particular, an understanding of Professor Milgram's research principles can greatly help those who want to bid in a Google ad Auction. When a company wants to promote itself on Google search results and appear in the top results, it must participate in a Auction that will determine the company's position on the results page for each search word. The Auction is called the Second Price Auction, or Vickrey Auction, named after the first winner of the Nobel Prize in Economics in the field of Auction Theory, William Vickrey. In a second price Auction, the bidder who submits the highest bid for each search word wins the Auction and appears first, but the amount he pays will be equal to the second bid in nature, meaning the bidder will pay a lower amount than he bid. This may sound strange, or complicated, but it turns out to be an ingenious method. Since every bidder knows that he will not pay the price he bids, he should name the highest price that will still leave him a profit. For example, if I think winning a particular Auction would give me a profit of $1000, I should bid $999.99. It guarantees me a win against any competitor who offers less and in the worst case there will be someone else who will bid the same amount as me and I will be left with a profit of one cent. Which is better than nothing. This Auction method provides the answer to Google's most significant challenge, namely deciding which advertiser can use the search terms that have been put to Auction in the best way and what the true value of each word is.

What will be the actual difference between the first bid and the second?

The difference between the bids for each search word depends on the number of bidders and their evaluation of the contribution of each word to the realization of their purpose. For very popular words the difference will be close to zero and for words that are searched for less the difference will be greater.

The novelty of Nobel prize winners and the curse of the winner

Paul Milgram coined the terms "shared value" and "private value" in reference to a bidder's assessment of winning an Auction. In private value Auctions, each bidder knows what his profit will be from winning, but he does not know what the profit of each of the bidders is. For example, in an Auction for the purchase of vehicles, each bidder knows what the cost for the purchase of the vehicle and therefore how much he will earn if he wins the Auction, but he does not know how much the others will profit. In shared value Auctions, the winning value is similar for all bidders but they do not know what it is. For example, in an Auction for the purchase of a concession for oil drilling, the number of barrels they will find does not depend on the identity of the winner and will be similar for all bidders, but none of the bidders knows what it is. In Google Auctions, participants do not know the level of bids of others. Participants in joint value Auctions may suffer from the phenomenon of “Winner’s Curse” because the winner of the Auction is the bidder who estimates that his profits are the highest. Because that way, he will bid the highest amount in the Auction. Since even a bidder does not know what his costs are; with Google ad Auctions the bidders' payment is for each click. Therefore, in this case bidders may pay much more than the value they get from clicking on their ad i.e. they lose.

Sponsored promotion in Google search results

There are two main challenges for bidders in Google's sponsored promotion Auctions. The first is to identify the differences between the various bids and offer the minimum amount above the second bid in nature. The second challenge concerns the search terms. Google offers many search terms and most of the search words are irrelevant, but according toGoogle, they indirectly help to reach the advertiser's site and achieve its goals. Google's goal is to offer as many search terms as possible to increase its profits. The challenge is to select the most relevant from the search terms and analyze the indirect effects of the various words in order to maximize the profit from advertising with Google's sponsored promotion Auctions. The novelty of the Nobel Prize winners, presented in the article, makes it possible to divide the Auctions into different types and determine winning strategies both for the Auction editors and procurement managers as well as for the bidders in the Auctions.

Written by Dr. Shaul Almakias & Dr. Yariv Walzman, experts in Auction Theory from ECONART