search2 - Internet Advertising and the Generalized...

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Unformatted text preview: Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords By B ENJAMIN E DELMAN , M ICHAEL O STROVSKY , AND M ICHAEL S CHWARZ * We investigate the “generalized second-price” (GSP) auction, a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. 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, we describe the generalized English auction that corre- sponds to GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG. ( JEL D44, L81, M37) This paper investigates a new auction mech- anism, which we call the “generalized second- price” auction, or GSP. GSP is tailored to the unique environment of the market for online ads, and neither the environment nor the mech- anism has previously been studied in the mech- anism design literature. While studying the properties of a novel mechanism is often fasci- nating in itself, our interest is also motivated by the spectacular commercial success of GSP. It is the dominant transaction mechanism in a large and rapidly growing industry. For example, Google’s total revenue in 2005 was $6.14 bil- lion. Over 98 percent of its revenue came from GSP auctions. Yahoo!’s total revenue in 2005 was $5.26 billion. A large share of Yahoo!’s revenue is derived from sales via GSP auctions. It is believed that over half of Yahoo!’s revenue is derived from sales via GSP auctions. As of May 2006, the combined market capitalization of these companies exceeded $150 billion. Let us briefly describe how these auctions work. When an Internet user enters a search term (“query”) into a search engine, he gets back a page with results, containing both the links most relevant to the query and the spon- sored links, i.e., paid advertisements. The ads are clearly distinguishable from the actual search results, and different searches yield dif- ferent sponsored links: advertisers target their ads based on search keywords. For instance, if a travel agent buys the word “Hawaii,” then each time a user performs a search on this word, a link to the travel agent will appear on the search results page. When a user clicks on the spon- sored link, he is sent to the advertiser’s Web page. The advertiser then pays the search engine for sending the user to its Web page, hence the name—“pay-per-click” pricing. The number of ads that the search engine can show to a user is limited, and different positions on the search results page have different desir- abilities for advertisers: an ad shown at the top of a page is more likely to be clicked than an ad shown at the bottom. Hence, search engines need a system for allocating the positions to...
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search2 - Internet Advertising and the Generalized...

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