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Comment by iandanforth | Hacker News Reader

Correct way: Winner bids $1.00, 2nd Place bids $0.80, Winner pays $0.81

New way: Winner bids $1.00, 2nd place bids $0.80, Google adds 15%* markup to 2nd bid, Winner pays $0.93.

*used as example, not a verified number

Ahh okay, the missing piece is that the winner pays the second-highest bid, plus a penny. I can definitely see how this would be fraud, and how it could be justified internally by Google as "it's still less than they bid".

I'm not understanding this, how can it be fraud? (Genuine question, I'm not insinuating anything.)

I don’t think the point is that it’s fraudulent, remember that this is in the context of the antitrust trial. I think the point here is that they could only do that since they have a monopoly.

Though I’m not sure I even agree with that. It burns advertiser’s goodwill for sure, but they advertise on Google because it provides them with a ROI, not because there is no where else. This just forces them to tweak their bids more.

That’s without weighing in on whether Google has an illegal monopoly on search

Something can be both fraudulent and an antitrust issue. In fact there is probably a specific type of fraud which is just this (at least in the UK), which is "Fraud by abuse of position"

The UK legal definition of this would be met if a person/company:

1. occupies a position in which he was expected to safeguard, or not to act against, the financial interests of another person (e.g. operates an auction to tender their online marketing spend?)

2. abused that position (e.g. by putting in fake bids, which only they could do because of their position?)

3. dishonestly (e.g. intentionally failed to disclose or was otherwise intentionally dishonest)

4. intending by that abuse to make a gain/cause a loss (e.g. they intended to raise profits)

The abuse may consist of an omission rather than an act (e.g. number 3 can be a failure to disclose).

I meant that if they claimed that the winner would pay the runner-up bid plus a penny, and then the winner actually paid the runner-up bid plus a percentage, plus a penny, then that would be fraudulent (assuming it was not disclosed).

The allegation is that Google profited from lying, which is the definition of fraud. They stole, by making someone pay more than they otherwise would have, through deception. If the deal was “you pay what you bid” then this would be fine, but that was not the deal.(To be clear, I have no idea what the deal was, I’m just explaining the OP)

Exactly this. You can end up with some weird situations. I saw one guy get a criminal conviction for this: he repaired elevators. He left RepairCorp where he worked and set up on his own. BuildingCorp continued to pay him for their repairs not realizing it wasn't RepairCorp. In the trial they stated that they were always very happy with his work and the price was identical to RepairCorp. They were pissed he had lied to them though, and the guy ended up getting convicted for fraud.

I'm aware of what fraud is, I just didn't understand based on the parent comments what fraud was being committed (what lies were told, etc). I didn't pick up on the fact that Google was advertising paying the runner-up bid plus a penny but then marking up the runner-up bid substantially.

But that's not what the witness expert claims. He said "squashing".

Google used a second price auction, and also it ranked ads in the auction by bid multiplied by click through rate. Squashing is something like ranking ads by (bid * power(ctr, gamma)) where 0 < gamma < 1. In auctions where the 3rd bid (or lower) wins under the (bid * ctr) rank switching to squashing may increase revenue, because the actually higher bid will win the auction.

I have the same question too, say on ebay if I bid for something for a $1.00 but the second highest bidder was $.80, would i pay the $1.00 or $.80? (Its been a long long time I used ebay or did any bidding)

You'd pay $.80 plus minimum overbid amount - so $.81 or $0.85 or sth like that.

From memory, $1 is your maximum bid, your actual cost would be $.81 (or whatever the increment is over 2nd place).

Winner expects to pay runner-up bid (this is a very important piece, because this changes the behaviour of bidders). Google quotes them an incorrect bid in order to collect more.

Ahhh okay, that's the part I was missing. Thanks.

> New way: Winner bids $1.00, 2nd place bids $0.80, Google adds 15%* markup to 2nd bid, Winner pays $0.93.

This is true. But the story gets crazier. Let's say that CorpA and CorpB are both bidding on the term "Valuable Widgets". Here is who it goes:

CorpA bids $0.80

CorpB bids $1.00

CorpB wins the auction, pays $0.80 + 15% = $0.92

CorpA is sad they lost and wants so they try to outbid. They must pay $1.00 + 15% or $1.15

CorpA wins the new action, paying $1.15

CorpB needs those auctions to sell more widgets, so they now must pay $1.15 + 15% or $1.32

It obviously goes back and forth, but as you can see, Google is widening the gap each time to escalate the bid up faster. It increases competition and raises prices. In order to win you can't just pay what the previous person paid, you must pay a premium of 15%.

Now the part that is unclear is what happens if you ignore the winning bid price. So if CorpA has a max bid of $1.00 and CorpB tries to bid, they will see that they need to bid $1.15 to win the bid, because Google is saying that is what is needed to win the auction, but if CorpB only bids $1.10 they should still win the auction at $1.10 since that is their max bid and CorpA is only willing to pay $1.00. So CorpB in this case would pay their max bid and win. But either way, google is artificially pushing the price up higher than it technically needs to be.

That doesn't sound right. If the loser can see what the winner bid, they'd just need to bid for $1.01 next time to win. They'll get charged $1.15, but their bid will be $1.01, which means the loser next round will see that that was the winning bid and they'll know to bid for $1.02, and so on.

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