We all have a mental image of an auction. A buzzing hotel conference room, bidders holding up numbered cards as they shout out a price; auctioneer standing at the podium with gavel in hand, ready to sell off at the highest price. Who knows, maybe it’s all for a cliché painting.

Now scrap that image because as Dirk Bergemann sees it, the Internet and companies like Google are changing everything.

     Professor Bergemann has researched game theory for most of his professional career. As he puts it, “much of economics is only fascinating when each party has asymmetric information, leading to the questioning of actual deal values.” But as he’s finding in his research, the World Wide Web has redefined our concept of auctions and game theory application.

     “The Internet is interesting… because of the large number of individuals interacting with each other and the highly decentralized and private nature of information. Yet it has the ability to aggregate all of this information in an incredibly fast, rapid, and efficient rate at a scale you couldn’t have thought about before,” Bergemann tells us as we sit in his Hillhouse Avenue office. “Think of recommender websites like Netflix and Amazon; you not only see the product but you also see ratings which customers have given. So this is an example where you have information aggregation; even if I don’t know the right product for me, I now have the ability to retrieve that information which would otherwise have not been available. In other words, I can now make a more informed choice.”

     The effect of the Internet on game theory application seems consequential, but Google demonstrates just how much market structures can change. “Google is making basically 95% of its profits from auctions that they run for sponsored search. It’s sort of an amazing thing if you think about it, it basically says to advertisers ‘we are willing to list your link in a prominent place (at the top or on the side of the search page) if you are going to bid for the right to be listed there under that specific keyword.’ So Google runs a completely open real-time online auction where everybody can submit at any time a bid to have his/her link listed following a search on the Internet. This auction is real-time and ongoing, meaning at any time an advertiser (think Amazon or General Motors) can basically say ‘well, if this keyword or combination of keywords comes up, please put me on top and here’s how much I’m willing to pay for you to do that.’ “

“What Google is doing is telling you nothing of that at all, they just say: ‘you tell me the maximum price that you’re willing to pay, and I’m going to weigh your bid with some unknown weight which I compute internally. I guarantee you that you won’t have to pay more than what you bid (sometimes you have to pay even less) but that’s all the information that you get’.”

     So right now there is no public transparency into how Google is weighs these bids? “No, and actually that’s exactly the interesting aspect of it. There are some reasons why Google may want to keep this private: Google uses algorithms, and their values are basically coming from the huge amount of information that they collect. So in some sense they have propriety rights on the information, but it’s still important to observe that it’s very different from the sort of auction that we are familiar with. What we would like to know is what are the properties of this auction. Is it an efficient auction? What are its revenues? What kind of implications does it have in terms of the welfare for small vs. large bidders, and so on. This is interesting empirically, as there are millions of keywords and there are auctions going on continuously for these keywords. In terms of real world bidding, this is an incredible trove of data.”

     While Google may be one of the largest corporations worldwide, truly robust research into Google’s methods will surely have implications beyond its own activities. We asked Bergemann what these areas would be, and he aptly pointed to the role which asymmetric information played in the recent financial crisis. “Coming from a microeconomist/game theory point of view, what’s interesting is that most of the collapse of the market was due to a dramatic increase in sensitivity of information; people were very careful not to reveal their information. One of the outgrowths of the crisis is the need to research how to make markets informationally robust and [therefore] less sensitive”.

     Given the advent of the Internet, Google was able to fundamentally change the balance of game theory. We asked Professor Bergemann whether he believed it was feasible to experience another paradigm shift of similar magnitude in our lifetimes. His response: “Absolutely. Google is less than 10 years old, and that is an incredibly short amount of time given the large amount of mobile data being provided to people at their fingertips. In the next decade, as the Internet expands and more data is collected and transferred, it will have dramatic implications for the transformation of everything we know. Simply put, the rate of change has dramatically increased.”

Looks like the days of the traditional auction are numbered.