Which mechanism for sponsored search auctions with externalities?

Sponsored search is one of the most successful applications of economic mechanisms in real life. A crucial issue is the modeling of the user behavior to provide the best targeting of ads to each user. Experimental studies show that the click through rate of an ad is dramatically affected by both its position and the other displayed ads. However, these externalities rise severe currently open computational issues in the determination of the best allocation and of the payments, preventing their adoption in practice so far. In the present paper, we provide a number of results when the most famous externality model, the cascade model, is adopted: we design the first exact algorithm for computing the efficient allocation, we show that the previously presented constant–approximation algorithm does not lead to any incentive compatible mechanism, we design a monotonic constant–approximation algorithm for finding the allocation and two different polynomial–time algorithms for the payments, each with different properties, leading to incentive compatible mechanisms. Finally, we provide a thorough experimental evaluation of the presented algorithms with Yahoo! Webscope A3 dataset to identify which mechanism should be adopted in concrete applications.