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BENJAMIN EDELMAN, MICHAEL OSTROVSKY, AND MICHAEL SCHWARZ

Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords. BENJAMIN EDELMAN, MICHAEL OSTROVSKY, AND MICHAEL SCHWARZ American Economic Review, vol . 97(1 ), March, 2007 Bo Zhou. Generalized First-Price Auction.

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BENJAMIN EDELMAN, MICHAEL OSTROVSKY, AND MICHAEL SCHWARZ

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  1. Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords BENJAMIN EDELMAN, MICHAEL OSTROVSKY, AND MICHAEL SCHWARZ American Economic Review, vol. 97(1), March, 2007 Bo Zhou

  2. Generalized First-Price Auction • Advertisers get positions according to their bids. Each one pays exactly the amount of his or her bid for each click. Suppose we have three bidders and two advertising positions with CTRs of 200 and 100, respectively.

  3. Generalized First-Price Auction • But smart advertisers always try to minimize costs.

  4. Generalized First-Price Auction • Using GFP, the auction can be extremely volatile, even chaotic. Bidders have strong incentives to “game” the system by slightly outbidding the advertiser right above. The ad sellers ultimately swallow the loss. • Consider the following example in which Windows employs a bidding robot while both Mac and Linux bid manually.

  5. Vickrey–Clarke–Groves Auction (VCG) • Advertisers get positions according to their bids. Each one pays the “externality” he or she imposes on others by taking one slot away. B should pay what C and D lose.

  6. VCG Auction • Truth-telling is a dominant strategy under VCG. • A dominant strategy performs at least as well as any other strategy in any situation. • Simply put, it is one of your best responses to the auction. • Still, ad seller’s revenue suffers.

  7. Generalized Second-Price Auction • Advertisers get positions according to their bids. Each one pays the amount of bid of the advertiser right blew for every click. Consider the following example where everybody bids truthfully. It appears that nobody has any incentive to shift bidding strategy because nobody will be better off by doing so!

  8. Generalized Second-Price Auction • This situation is called an equilibrium. In an equilibrium, everyone chooses the best strategy by taking into account every other’s strategy. In other words, nobody can be better off by shifting strategy unilaterally. • The example on the last slide shows that using truth-telling strategy under GSP can produce equilibrium. From an bidder’s perspective, using truth-telling strategy under GSP can maximize its payoff. Just sometimes!!!

  9. Generalized Second-Price Auction • Let’s consider a similar example where the CTRs of both positions are now 200 and 199. • If all three bidders stick to the truth-telling strategy. However, what if Windows decides to change course?

  10. Locally envy-free Equilibrium • Equilibrium looks fine, but is it stable? • Not necessarily. • An advertiser may have incentives to behave aggressively to swap positions with the advertiser right above him or her.

  11. Locally envy-free Equilibrium Now CTRs change to 300 and 100, respectively. Mac wants to provoke.

  12. Locally envy-free Equilibrium Apparently, Windows would like to retaliate. • Locally envy-free equilibrium is an equilibrium where no advertiser has any incentive to swap positions with the advertiser right above him or her. • Locally envy-free equilibrium is stable.

  13. Locally envy-free Equilibrium • Construct a particular locally envy-free equilibrium where all advertisers’ payments coincide with their payments in truth-telling equilibrium in VCG. • Advertisers are labeled in decreasing order of their values, i.e., if , then . • , • is advertiser k’s bid; is the payment of advertiser k-1 in the truth-telling strategy equilibrium of VCG; is position k-1’s CTR.

  14. A little history Generalized First-Price Auction GoTo (now called Overture under Yahoo!) invented GFP auction in 1997. It probably marked the start of pay-per-click era of Internet advertising. VCG Auction It was first proposed by Vickery in 1961. I have not found any evidence suggesting it was used by any major search engine. Generalized Second-Price Auction GSP was first introduced by Google in 2002. Yahoo! switched to GSP soon after.

  15. Why GSP, not VCG? • VCG seems to be such an elegant mechanism. In fact, William Vickery won a Nobel Prize for it. • GSP appeared first. So, it has the upper hand. • VCG is hard to explain. • Switching is expensive. • Revenue prospects are uncertain.

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