Strategic bidder behavior in sponsored search auctions

We examine prior and current sponsored search auctions and find evidence of strategic bidder behavior. Between June 15, 2002, and June 14, 2003, we estimate that Overture’s revenue from sponsored search could have been more than 60% higher if it had been able to prevent this strategic behavior. We also show that advertisers’ strategic behavior has not disappeared over time; rather, such behavior remains present on both Google and Overture. We conclude by discussing alternative auction designs that could reduce this strategic behavior and raise search engines’ revenue, as well as increase the overall efficiency of the market.