Google’s alleged ploy to corner the online advertising market

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In 2010, a Google Product Manager Scott Spencer gave an interview explaining Google’s use of “second-price” auctions to serve ads on the web. In a second-price auction, the highest bidder wins, but only has to pay whatever second the highest bid was. Economists love this setup — the guy who theorized it won a Nobel Prize — because it encourages participants to bid on what the item is really worth to them without worrying about paying too much. As Spencer explained, “It minimizes the need to ‘play’ with the system.

What if Google was playing with the system?

That’s the charge 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 favor using inside information. As one employee put it in a recently leaked internal document, Google’s public assertion about second-price auctions was “false.”

The Texas case, one of many the company is facing, targets Google’s control of the auction display advertising market. Google completely dominates all the links in the chain between the advertiser and the public. It has the largest buyers platform, the largest ad exchange and the largest publishers platform. So when you see an ad on a website, chances are the advertiser used Google to place it, Google’s exchange submitted it to the site, and the site used Google to render the space available. In other words, Google administers the auction while representing both buyers and sellers in that auction.

This presents an obvious conflict of interest. As one employee, quoted in a previously unsealed version of the lawsuit, said, “The analogy would be if Goldman or Citibank owned the NYSE.” According to Texas, Google has not resisted the temptation to use its control of the market to its advantage. The lawsuit accuses him of deploying at least three secretly designed programs to distort supposed second-price auctions. While the existence of these programs was already public, the newly unredacted complaint provides new details about how they allegedly operate.

The first program, launched in 2013, was the oddly named Project Bernanke, after former Federal Reserve Chairman Ben Bernanke. According to the Texas 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 this case, the advertiser who bid $10 should win the auction and pay the publisher $8. Under Project Bernanke, however, Google would instead pay the publisher regardless of the third-the highest bid was, say, $5, while still charging the advertiser the full $8.

What happened to the $3 difference? According to the complaint, Google would siphon it off into a “Bernanke pool” that it used to profit from its own ad-buying tool, Google Ads. The filing cites a 2014 internal document in which a Google employee describes the need to reverse “a disturbing trend of 2013”: competing ad-buying platforms were winning too many bids on AdX. According to the complaint, Google used pool money to increase bids that would otherwise be lower than bids placed through these other platforms. (That might explain why the program is named after Bernanke, who promoted “quantitative easing” — pumping money into the economy — to fight the Great Recession. An internal Google slide uses the phrase quantitative easing quantitative.) At first, Google tracked how much money it was withholding from publishers and eventually refunding them. But, according to the complaint, later versions of the program even stopped doing this.

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