Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords

22 Pages Posted: 8 Feb 2006 Last revised: 24 Feb 2021

See all articles by Michael Ostrovsky

Michael Ostrovsky

Stanford Graduate School of Business

Michael Schwarz

Yahoo! - Yahoo! Research Labs; National Bureau of Economic Research (NBER)

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit

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Date Written: November 2005

Abstract

We investigate the "generalized second price" auction (GSP), a new mechanism which is used by search engines to sell online advertising that most Internet users encounter daily. GSP is tailored to its unique environment, and neither the mechanism nor the environment have previously been studied in the mechanism design literature. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. In particular, 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 in a dynamic environment, we describe the generalized English auction that corresponds to the GSP and show that it has a unique equilibrium. This is an ex post equilibrium that results in the same payoffs to all players as the dominant strategy equilibrium of VCG.

Suggested Citation

Ostrovsky, Michael and Schwarz, Michael and Edelman, Benjamin G., Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords (November 2005). NBER Working Paper No. w11765, Available at SSRN: https://ssrn.com/abstract=847037

Michael Ostrovsky

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States
650-724-7280 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/ostrovsky/

Michael Schwarz (Contact Author)

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://people.hbs.edu/bedelman

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