Thursday, February 16, 2012

Unfairness and Fraud in Ad Auctions

In online ad auctions, advertisers want visitors to click on their ads to sell their products. A site owner has a certain number of impression slots to allocate, so advertisers compete in bidding to obtain these slots. There are two main models for payment, cost-per-click (CPC) and cost-per-impression (CPM). The site owner can guarantee impressions but cannot guarantee clicks because the quality and placement of the ad affects the click-through rate (CTR) of each user. This disparity suggests that site owners have an incentive to improve CTR for ads paid under the CPC model and increase the number of impressions without regard for CTR for ads paid under the CPM model.

Terms defined:
Cost-per-click (CPC): a model where the advertiser pays each time a visitor clicks on the ad
Cost-per-impression (CPM): a model where the advertiser pays each time a visitor is shown the ad
Click-through-rate (CTR): the rate at which a visitor who is shown the ad clicks on it

            In one case study, an advertiser published the same advertisement on Facebook under the CPC and CPM models. Since the same ad was used in each case, we would expect the same click through rate if they win the same ad placement slots. At the very least, we would expect that the computed CPC for both models is equal; advertisers should be indifferent between bidding for their ad in the CPC and CPM auctions. The results are below:

            While it was expected that there would be a bias towards higher CTR in the CPC model, it turns out that the ad under CPC got about 7 times (.048% vs .007%) the CTR than the CPM version. In fact, the CPC model was charged $0.51/click vs the CPM model’s $1.29/click. [You find the CPM ad's true CPC by Amount Spent / # Clicks]. It appears that the CPM model is charged a lot more than the CPC model for the utility (clicks) it is getting. In conclusion, Facebook ads are extremely biased towards serving CPC ads in better locations on its page compared to CPM ads. This is all legal but is an indication of the unfair/shady actions one can take in ad auctions.

            Google’s Adwords and Facebook’s ad auctions suffer from a lack of transparency. You give them bids and an advertisement, and they determine how much to charge you. We may know that Google’s ad auction is based around the Generalized Second Price auction and that Facebook uses the Vickrey-Clarke-Groves auction, but they assign a hidden quality factor to your advertisement that modifies your bid in a way that in theory, maximizes their profit. It is unclear, however, how they do this. Facebook’s vague ad auction page fails to explain this. In particular, it is unclear how these companies detect fraud.

            Google, Facebook, and other sites that generate revenue from advertisements have an incentive to play unfairly by over-reporting the number of clicks and impressions made. For example, ads may appear for only a brief period of time, in an obscure region of the page, or even in size-0 iframes (html elements that can load different pages) [Source: Wikipedia]. Worse, Google’s instant search refreshes the page almost every time a new word is added/removed from the query, potentially leading to a large number of impressions, despite no opportunity to click on any of the ads. But Google and Facebook are not the only ones who can cheat the system. The advertiser’s competitors can also falsely click on ads in order to charge their competitor’s more in the CPC model. Obviously, any fraud will not be blatantly obvious, but it is easy to see that people can slip a few extra clicks or impressions through the cracks.

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