Sponsored search advertising (SSA), the primary revenue source of Web search engine companies, has become the dominant form of online advertising. Search engine companies, such as Google and Baidu, are naturally interested in SSA mechanism design with the aim to improve the overall effectiveness and profitability of SSA ecosystems. Due to model intractability, however, traditional game theory a...

We characterize the optimal (revenue maximizing) auction for sponsored search advertising. We show that a search engine’s optimal reserve price is independent of the number of bidders. Using simulations, we consider the changes that result from a search engine’s choice of reserve price and from changes in the number of participating advertisers.

Modern sponsored search auctions are derived from the Generalized Second Price (GSP) auction. Although the GSP auction is not truthful, results by Edelman, Ostrovsky, and Schwarz [7] and Varian [13] give senses in which its outcome is equivalent to that of the truthful and welfaremaximizing VCG mechanism. The first main message of this paper is that these properties are not unique to the GSP au...

There are two kinds of bidders in sponsored search: most keep their bids static for long periods of time, but some do actively manage their bids. In this work we develop a model of bidder behavior in sponsored search that applies to both active and inactive bidders. Our observations on real keyword auction data show that advertisers see substantial variation in rank, even if their bids are stat...

Simplified Mechanisms with an Application to Sponsored-Search Auctions Paul Milgrom First draft: August 16, 2007 This draft: December 17, 2008 A mechanism can be simplified by restricting its message space. If the restricted message spaces satisfy a certain “outcome closure property,” then the simplification is “tight”: for every , any Nash equilibrium of the simplified mechanism is also an Nas...

Google and Bing employ generalized second price (GSP) auctions to allocate billions of dollars of sponsored search advertising. The theoretical work establishing the VCG equivalence of the GSP hinges on strong, and largely untested, assumptions about the causal impact of ad position on user click probability and the value of resulting clicks. We re-purpose internal business experimentation to t...

There are m positions to be allocated among n bidders, where n > m. We assume that the (expected) click-through rate of bidder i in position j is of the form αiγj , i.e. separable into an advertiser effect αi ∈ [0, 1] and position effect γj ∈ [0, 1]. We assume that γ1 > γ2 > . . . > γk > 0 and let γj = 0 for j > k. We will sometimes refer to αi as the relevance of bidder i. It is useful to inte...

English auctions are applied in many current e-commerce applications because of the easy implementation. Some sponsored search advertising (SSA) services consider the ascending bidding rules of English auctions to determine winners. However, the high computation cost of determining winners is the major drawback of the English auction-based SSAs. Because the SSA is an online service, Internet us...

Two-sided matching markets play a prominent role in economic theory. A prime example of such a market is the sponsored search market where n advertisers compete for the assignment of one of k sponsored search results, also known as “slots”, for certain keywords they are interested in. Here, as in other markets of that kind, market equilibria correspond to stable matchings. In this paper, we sho...

On search keywords that include trademarked terms, the brand owner (focal brand) and other relevant firms compete for consumers. For the focal brand, paid clicks have a direct substitute in the organic link that appears directly below the advertisements. This crowd-out can create a large wedge between the real causal effect and commonlyreported “nominal measures,” such as click-through rates. W...