INTERNET ADVERtising and the generalised Second-price auction:

1. INTERNET ADVERtising and the generalised Second-price auction: Selling Billions of Dollars Worth of Keywords By Benjamin Edelman, Michael Ostrovsky And Michael Schwarz Presented By: Mitali Dhoble Reference: http://msrvideo.vo.msecnd.net/rmcvideos/104547/dl/104547.pdf

2. Contents • What is Generalized Second-Price Auction(GSP)? • Structure and Evolution of Sponsored Search Auctions • Rules of GSP • GSP and Locally Envy-Free Equilibria • GSP and Generalized English Auction • Pros and Cons • Conclusion Generalized Second Price Auction

3. What we already studied in class • Search Engine Advertising • Pay-per click model • Google’s AdSense system • Click-through rates (CTR) Generalized Second Price Auction

4. GSP and what it means • An auction mechanism tailored to the unique environment of the market for online ads. • Search engines need a way to allocate positions to advertisers and auctions are a natural choice. • Commercially very successful • Over 98% of Google’s revenue in 2005 came from GSP • Over 50% of Yahoo’s revenue in 2005 came from GSP Generalized Second Price Auction

5. Simplest GSP auction • Bid per specific keyword • Form of pay-per click advertising • Advertisements are shown in decreasing order of bids • Advertiser will pay the bid amount equal to that of the advertiser one position below • Advertisers can change the bids at any given time Generalized Second Price Auction

6. The Structure and Evolution of Sponsored Search Auctions • Notable Features of the Market for Internet Advertising • Bids can be changed anytime • Search engines sell flows of perishable advertising services than storable objects • There is no unit of measurement of Internet advertisement that is natural from all the involved parties point of view Generalized Second Price Auction

7. The Structure and Evolution of Sponsored Search Auctions • Evolution of Market Institution • Early Internet Advertising • Generalized First-Price Auction • Generalized Second-Price Auctions Generalized Second Price Auction

8. Rules of GSP • For a given keyword, N objects and K bidders • αi : Expected number of clicks received by ad in position i • sk : The value per click to advertiser k • αisk – payments = k’s payoff from being in position i • b(j) : Bid of jth highest bidder • g(j) : Identity of jth highest bidder • p(i) = αib(i+1) : Total payment of bidder g(i) • αi(s(i) - b(i+1)) : g(i)’s payoff Generalized Second Price Auction

9. GSP versesVCG • Each advertiser’s payment would be at least as large under GSP as under VCG, if all of them were to bid the same amounts under the 2 mechanisms. • Truth-telling is a dominant strategy under VCG • Truth-telling is not a dominant strategy under GSP Generalized Second Price Auction

10. Locally Envy-Free Equilibria Definition: An equilibrium of the simultaneous move game induced by GSP is locally envy- free if a player cannot improve his payoff by exchanging bids with the player ranked one position above him. Generalized Second Price Auction

11. Lemma 1: The outcome of any locally envy- free equilibrium of auction Г is a stable assignment. Lemma 2: If the number of advertisers is greater than the number of available positions, then any stable assignment is an outcome of a locally envy-free equilibrium of auction Г Generalized Second Price Auction

12. GSP and Generalized English Auction • Clock showing current price, which increases over time • Advertiser can drop out at any time, and his bid is the price on the clock when he drops out. • Auction ends when next-to-last advertiser drops out. • Last remaining advertiser is given the best position on screen and his payment is equal to next-to-last advertiser’s bid and so on. Generalized Second Price Auction

13. Pros • Includes many examples, theorems and proofs which make it easier to understand the concept • Along with GSP, the paper also covers in detail another strategy, namely VCG. • The detailed analysis compels the reader to contemplate the subject along various dimensions, which will lead to an improved strategy. Generalized Second Price Auction

14. Cons, Questions and Comments • Analysis is done assuming that all advertisers are identical along dimensions other than pay-per click value. • Should search engines use GSP or VCG? • How quickly do the bidders converge to an equilibrium? Generalized Second Price Auction 14 8/20/2014

15. Conclusion • GSP is basically tailored for the unique Internet advertising market. • Though GSP looks very similar to the VCG mechanism, its properties and equilibrium behavior is very distinct. • The generalized English auction has a unique equilibrim: • Bid functions have explicit analytic formulaes. • The functions do not depend on bidder’s belief about each other’s types, but only on the realization of bidder’s values. • An interesting mechanism with notable features in theory as well as enormous popularity in practice, developed as a result of evolution of inefficient market institutions. Generalized Second Price Auction