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Unformatted text preview: Strategic Bidder Behavior in Sponsored Search Auctions Benjamin Edelman Harvard University [email protected] Michael Ostrovsky * Stanford University [email protected] Abstract We examine sponsored search auctions run by Overture (now part of Yahoo!) and Google and present evidence of strategic bidder behavior in these auctions. Between June 15, 2002, and June 14, 2003, we estimate that Overture’s revenue from sponsored search might have been higher if it had been able to prevent this strategic behavior. We present a specific alternative mechanism that could reduce the amount of strategizing by bidders, raise search engines’ revenue, and also increase the overall efficiency of the market. We conclude by showing that advertisers’ strategic behavior has not disappeared over time; rather, such behavior remains present on both search engines. 1 Introduction Search engines have considerable flexibility in designing systems to allocate their sponsored links. Modern information systems make it easy to receive information from advertisers about their desired ad placements and other goals, as well as to provide feedback about outcomes. But how exactly should search engines structure these sales? Auctions are a natural choice. They relieve sellers of explicitly assigning a valuation to each item to be sold; instead, the market structure naturally assigns a valuation. This benefit is surely substantial in the context of thousands of search keywords, each independently valued by different would-be advertisers. Furthermore, auctions generally assure that each available item is sold—also an important benefit, since search advertising inventory is perishable, disappearing instantly if no advertisement is available to fill a placement spot. Hence, it is not surprising that most search engines choose to auction off their sponsored link advertisements. But even after choosing an auction over alternative sales channels, important deci- sions remain to be made. How much information should advertisers receive about other advertisers’ bids? In what order should bids be shown in search results? What relationship should there be between an advertiser’s bid and the amount the advertiser is actually charged? More broadly, how should these auctions be designed? * We are grateful to David Pennock and Yahoo! for data and advice. We also thank the editor, two anonymous referees, Drew Fudenberg, Louis Kaplow, Ariel Pakes, Al Roth, Michael Schwarz, and the participants of the First Workshop on Sponsored Search Auctions for helpful comments and suggestions. 1 While it is clear that differently designed auctions will have different properties, it is not imme- diately obvious that these differences are important enough for market designers to worry about....
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This note was uploaded on 12/08/2011 for the course CIS 620 taught by Professor Cis620 during the Fall '08 term at UPenn.
- Fall '08