Databases Reference
In-Depth Information
Therefore, the best
available
indicator of near-perfect information in auctions
like those of sponsored search is the price of a product. For example, the average
bid of a keyphrase in a vertical with many advertisers reflects the best information
available, given that there is no perfect information [
6
].
To me, at least, this process has a lot in common with the
wisdom of the crowd
[
7
], in which a set of independent decisions by separate individuals collectively is
often right. In the case of sponsored-search auctions, the crowd's wisdom appro-
priates perfect information in the auction.
In the earliest form of sponsored search [
8
], from GotTo.com, the keyphrase auc-
tion was standard in that the highest bidder was always the winner. However, most
sponsored-search auctions are now nonstandard auctions, where the
winner
of the
auction is not always the bidder with the highest bid. More on that later.
Most sponsored-search auctions are also sealed-bid auctions, where the amount of
the bids of one participant is not known to the other market participants. This is dif-
ferent from an open auction (e.g., a cattle auction or an auction at Sotheby's), where
everyone participating knows all the bids. The original sponsored-search auction was
an open auction (see Chapter 2 overview of sponsored search).
So, although there are some similarities to standard auctions, as you can see, there
are also some noticeable differences with sponsored-search auctions.
Moreover, keyword bidding and the allocation implementation can get rather com-
plex rather quickly, especially given the scale of major sponsored-search auctions. In
sponsored search, millions of both bid and price adjustments occur in near-real time,
depending on the traffic to the sponsored-search platform.
The complexities of online auctions have lead to their academic study and research,
in a discipline known as auction theory, which is an offshoot and an applied branch
of game theory.
Auction theory focuses on how people act in an auction, viewing the auction as
a game. Auction theorists typically focus on issues such as the efficiency of a given
auction design (i.e., how well the auction achieves the goals of all parties in the
auction, including the auctioneer), optimal and equilibrium bidding strategies, and
effectiveness of the auction in terms of revenue generation. Equilibrium strategies are
optimal with respect to opponents' bids held fixed. When a game hits equilibrium,
each player in the game is implementing a strategy that is unlikely to change. In clas-
sic auction theory, the participants are interested in maximizing their own situation
without considering others [
9
].
Auction theory research has lead to the development of several auction formats or
types of auction markets. The format that we are most interested in is the Generalized
Second Price auction and its poster-child auction, the Vickrey auction, as well as the
generalized form, the Vickrey-Clarke-Groves auction.
Potpourri
: Google AdWords was the first sponsored-search platform that utilized
the format now known as Generalized Second Price auction.
