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Google's Alleged Scheme to Corner the Online Ad Market

In 2010, a Google product manager named Scott Spencer gave an interview explaining Google’s use of “second-price” auctions to place ads across the web. In a second-price auction, the highest bidder wins, but only has to pay whatever the second highest bid was. Economists love this setup—the guy who theorized it won a Nobel Prize—because it encourages participants to bid whatever the item is truly worth to them without worrying about overpaying. As Spencer explained, “ it minimizes the need to ‘game’ the system.”

But what if Google was the one gaming the system?

That’s the accusation made in an antitrust lawsuit brought by a coalition of states led by Texas attorney general Ken Paxton. On Friday morning, a federal judge released an unredacted version of the most recent complaint in the case, which was first filed in 2020. The document provides unprecedented insight into how Google allegedly misled advertisers and publishers for years by manipulating auctions in its own favor using inside information. As one employee put it in a newly revealed internal document, Google’s public claim about second-price auctions were “untruthful.”

The Texas case, one of several the company is facing, takes aim at Google’s control of the auction-driven display advertising market. Google utterly dominates every link in the chain between advertiser and audience. It owns the biggest buyer platform, the biggest ad exchange, and the biggest publisher platform. So when you see an ad on a website, it’s a good bet that the advertiser used Google to place it, Google’s exchange submitted it to the site, and the site used Google to make the space available. Google, in other words, runs the auction while representing both the buyers and sellers in that auction.

This presents an obvious conflict of interest. As one employee put it, quoted in a previously unsealed version of the lawsuit, “The analogy would be if Goldman or Citibank owned the NYSE.” According to Texas, Google has failed to resist the temptation to use its control of the market to its own advantage. The lawsuit accuses it of deploying at least three programs secretly designed to distort the supposed second-price auctions. While the existence of those programs was already public, the newly unredacted complaint provides new detail into how they allegedly work.

The first program, launched in 2013, was the strangely named Project Bernanke, as in former Federal Reserve Chair Ben Bernanke. According to Texas’s description of internal Google documents, here’s how it worked. Suppose the highest bid placed through AdX, Google’s ad exchange, was $10, and the second highest was $8. In that case, the advertiser who bid $10 should win the auction and pay the publisher $8. Under Project Bernanke, however, Google would allegedly instead pay the publisher whatever the third-highest bid was—let’s say $5—while still charging the advertiser the full $8.

What happened to the $3 difference? According to the complaint, Google would siphon it into a “Bernanke pool” that it used to advantage its own ad-buying tool, Google Ads. The filing quotes an internal 2014 document in which a Google employee describes the need to reverse “a worrisome 2013 trend”: rival ad-buying platforms were winning too many auctions on AdX. According to the complaint, Google used the money in the pool to boost bids that otherwise would be lower than bids placed through those other platforms. (This could explain why the program is named after Bernanke, who promoted “quantitative easing”—pumping money into the economy—to combat the Great Recession. An internal Google slide uses the phrase quantitative easing.) At first, Google kept track of how much money it was withholding from publishers and eventually paying them back. But, according to the complaint, later versions of the program stopped even doing that.

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In a statement, Google said, “AG Paxton’s latest allegation—that we generated a ‘third price auction’ or manipulated our ad exchange—is entirely inaccurate. As of September 2019, we have been running a first price auction, but at the time to which AG Paxton is referring, AdX absolutely was a second price auction.”

A second program called Dynamic Revenue Share allegedly focused on giving Google’s ad exchange a leg up. Ad auctions involve bids placed not just through different buyers but also different exchanges. The winner isn’t really the highest bid—it’s the highest bid after the exchange takes its cut. So, for example, if the highest bid through AdX was $15 and the highest bid from a competing exchange was $14.50, but Google took a 20 percent cut while the competing exchange only took 10 percent, the AdX bid would lose and Google wouldn’t make any money.

The complaint alleges that Dynamic Revenue Share helped AdX win auctions it should have lost. Because Google also runs the platform used by nearly every publisher, it gets to see the bids coming in from all the exchanges, not just its own. According to the complaint, under Dynamic Revenue Share Google would peek at all the bids and adjust its commission rate in order to win an auction. The newly unredacted complaint quotes a Google employee suggesting that the system was deceptive: “One known issue with the current DRS is that it makes the auction untruthful,” they wrote. By allegedly letting itself adjust its commission on a case-by-case basis, Google gave itself an advantage over other exchanges, which have to worry about losing auctions if they set their fees too high.

The final scheme alleged in the complaint undermines one of the most important aspects of second-price auctions. Because the winner’s bid is never disclosed, no one finds out how much they would have been willing to pay.

A program called Reserve Price Optimization allegedly undermined that benefit. In an ad auction, publishers get to set a minimum price, or floor, for the ad impression. If the floor is higher than the second-place bid, it essentially becomes the second-place bid. So if the top bid is $10, the second bid is $5, but the floor is $8, the winner ends up paying $8. According to the lawsuit, the RPO program used advertisers’ bid history to artificially inflate those price floors. For example, if a headphone company has repeatedly bid $20 to show you their ad, Google could use that information to raise the floor to $19.90—even if the publisher thought it had set its floor at $10. In other words, Google allegedly used advertisers’ past bids to squeeze more money out of them.

“How is this good for the buyer?” one major advertiser asked Google, according to internal records quoted in the complaint. “Because, I’ll tell you, it isn’t. It just raises the price.” The complaint cites an internal analysis that found that the program made Google an extra $250 million of annual revenue.

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The complaint also quotes two Google employees raising questions about the program. “Doesn’t that undermine the whole idea of second price auctions?” one wrote. “It’ll transform the system into a 1st price auction where the bidder has a strong incentive to bid LESS than he’s willing to pay. (Only just enough to win.) I don’t think that’s desirable for either side in the long term.”

The other employee put things even more bluntly: “Is RPO not just basically pushing our second price auction—that is supposed to be fair—toward a first priced auction?”

(While Google switched to a first-price system in 2019, the complaint alleges that the company continues to deploy a version of the RPO program under the codename Bulbasaur, as in the first-generation Pokémon.)

“These are more mischaracterizations, and contrary to the AG’s claims, these optimizations do not manipulate any bids,” Google said in a statement. More generally, it argued that the lawsuit is “full of inaccuracies and lacks legal merit” and that the display advertising market is highly competitive, a claim it elaborated in a blog post.

It’s not clear how the three programs described in the complaint would have netted out for advertisers and publishers. In some cases they seem to have siphoned money away from publishers, but in others they appear to have increased ad spending. Either way, the Texas lawsuit argues, they suppressed competition in online advertising, which would be bad for both sides of the market in the long run. As the case proceeds, Google may have to convince the judge and jury that its internal programs were really designed with everyone’s interests in mind—not just Google’s.


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