Databases Reference
In-Depth Information
less revenue because it is not getting the best price per keyword. Certainly the search
engines would like to receive the highest price possible, just as the advertisers would
like to pay the lowest price possible.
However, the Generalized Second Price auction offers some advantages to both the
search engine and the advertisers, which make it an attractive model for an auction.
Most notable among these advantages is reasonable stability. A Generalized Second
Price auction achieves this stability by encouraging advertisers to not bid too high as
an adversarial technique (i.e., there is no use in bidding extremely high to try and force
a competitor to bid higher, to really “win” the top space, etc.). From an overall auction
perspective, this has the advantage of keeping the auction stable, with few wide or
wild price swings once the auction reaches a point of stability. This is especially true
relative to a first-price auction [
22
] (i.e., you pay what you bid). The first-price auction
has no point of equilibrium or stability, so the bids can constantly be in flux.
However, stability is a range, not an exact point, and there can be situations in
a sponsored-search auction where it may be advantageous to bid somewhat higher
than optimal to hurt a competitor [c.f., 23]. However, this strategy has limitations
and beyond a certain bid point it becomes counterproductive, returning the auction
to equilibrium. So, the Generalized Second Price auction is still considered stable
within a small range of bids.
Why do you care about a stable auction?
Stability is an important element in continuous auctions such as sponsored search,
as it permits advertisers to develop rational and predictable bidder strategies.
Let us explore some sample scenarios with advertisers and different bidding strat-
egies to see the stability effect in action. Specifically, let us examine examples of
how bidding high is not a good strategy over time with the Generalized Second Price
auction.
Example - one advertiser bids high.
Let us say the general valuation for a click in
this industry vertical is $1.00.
What if one advertiser tried to drive up the keyphrase price? (Note: The moti-
vation could be anything from trying to use up the advertising budget of the other
advertisers to just waking up on the wrong side of the bed.) Let us take a look at this
possible scenario.
Once again, we have three bidders.
•
Bidder A bids $1.00
•
Bidder B bids $3.00
•
Bidder C bids $1.20
Notice that the bid for advertiser B is way out of whack with the other advertisers.
Advertiser B wins the bid, but in the sponsored-search auction, advertiser B pays
$1.21 for any clicks, which is the second-highest bid plus a small delta.
Why would advertiser B place such a high bid? Maybe advertiser B believes that
such a high bid would guarantee a top slot because other advertisers would be bid-
ding much lower. In this case, advertiser B achieved the objective and did not hurt the
other advertisers in the market.
