Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords

Abstract

We investigate the "generalized second price" auction (GSP), a new mechanism which is used by search engines to sell online advertising that most Internet users encounter daily. GSP is tailored to its unique environment, and neither the mechanism nor the environment have previously been studied in the mechanism design literature. Although GSP looks similar to the Vickrey-ClarkeGroves (VCG) mechanism, its properties are very different. In particular, unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP in a dynamic environment, we describe the generalized English auction that corresponds to the GSP and show that it has a unique equilibrium. This is an ex post equilibrium that results in the same payoffs to all players as the dominant strategy equilibrium of VCG.

To Score or Not to Score? Estimates of a Sponsored Search Auction Model

“…During the study period, WebsiteX applies standard GSPA without score weighting. The bidding environment of WebsiteX is therefore more closely related to the static model described in Edelman et al (2007) and Varian (2007).…”

“…Our specification details here contrast with those in Varian (2007), Edelman et al (2007), and Athey and Nekipelov (forthcoming), who consider a multiplicative specification of bidder's valuations:…”

“…Although sponsored advertising auctions have received great attention in the theoretical literature (beginning with Edelman et al (2007) and Varian (2007)), empirical research is still sparse. Börgers et al (2013) utilize a revealedpreference approach to test whether bids in Yahoo search auctions satisfied the Nash Equilibrium inequalities for the sponsored search auction model.…”

“…Börgers et al (2013) utilize a revealedpreference approach to test whether bids in Yahoo search auctions satisfied the Nash Equilibrium inequalities for the sponsored search auction model. Yang et al (2014) studied how competition affects sponsored search advertisers' bidding behavior, and they modeled bids as equilibrium outcomes using the specification in Edelman et al (2007). Athey and Nekipelov (forthcoming) propose and estimate a structural model tailored to specific features of sponsored search auctions run by US search engines (such as Google or Microsoft).…”

“…6 Consequently, as we mentioned earlier, the top positions may not always receive more clicks (and indeed, they do not, as we will show below). For this reason, the common assumption in the existing sponsored search auction models (Edelman et al (2007) and Varian (2007), Athey and Nekipelov (forthcoming)) that the surplus matrix is supermodular (being the product of a vector of bidder-specific constants and a nonincreasing vector of position-specific click-through rates) seems inadequate for WebsiteX. Accordingly, in our setup, we will allow the surplus to vary arbitrarily among merchants and across ad positions, and also allow click volumes to be non-monotonic in ad position.…”