Google, Auctions and Honesty
You’ve probably heard by now that the stock price of Google has crossed the five hundred dollar mark.
A couple of months back, I attended a talk by Dr. Prabhakar Raghavan. This was right after he was hired to lead the Research & Development for Yahoo! He spoke about a bunch of stuff, but the subject of advertisement pricing is what I found most interesting.
In 1996, James Mirrles and William Vickerey won the Nobel prize in Economics for coming up with the idea of Vickerey auctions in decision theory. The problem with ordinary auctions is that a big player can easily outbid a small player. Imagine the fair market price of a divisible commodity being $500, but a big player uses his monetary strength to outbid everyone by bidding for $1000. This might outprice the commodity for the small players making them less likely to compete. What would the auctioneer rather have: one sale at $1000 or ten sales at $500, the true market price?
The Vickerey method uses the second highest bid as the fair market price of the commodity.
From Google’s perspective, it doesn’t have to follow the Vickerey style strictly by the book. Instead it can pick a price midway between the first and second highest bids. This has a direct impact on the GOOG top line (revenue.)
For a fair perspective, you’ll also have to look at how other players in the market are doing. The management at the other big player in the market, YHOO posted less than spectacular results recently. You could attribute this to poor execution on Yahoo’s part, but the top brass also commented on the general poor performance of the overall market. This is key.
The cynic in me asks: Is GOOG screwing over the market for short term gain? If that’s so, will the Efficient Market Hypothesis re-adjust the market and dictate a slowdown in growth rate for GOOG over the next few quarters?
Is my reasoning correct, or am I missing something fundamental here?
December 21st, 2006 at 12:52 am
[...] I had previously written about conducting Vickerey-type auctions honestly. I also wrote about why Google doesn’t have to be completely honest to take advantage of the current hype around adwords, although temporary. This is the cynic in me speaking up, with absolutely no proof to back my claims. [...]