Databases Reference
In-Depth Information
So, all things being equal, it pays to have the best-performing ad for a given keyphrase
market. It permits you to bid less and get a better slot for your ad in the results listing.
Now that we know how the sponsored-search auction works, let us examine the
theoretical underpinning of such auctions.
The theoretical basis for the sponsored-search auction is the Generalized Second
Priced (GSP) auction. The Vickrey auction is the ideal form of GSP auction, so we
start here with a brief discussion of the ideal form.
A Vickrey auction
A Vickrey auction is a type of sealed-bid auction where bidders submit bids without
knowing the bid of the other people in the auction. The highest bidder wins, but the
bidder pays the amount of the second-highest bid.
Very similar to the Standard English auction that one might see at a livestock
sale, where all bids are public and known by all, the Vickrey auction gives bidders an
incentive to bid their true value. Naturally, this view of the value can be false, incor-
rect, or misguided. This possibility aside, however, each advertiser believes their val-
uation is correct. The concept of each buyer bidding the true value of the resource,
known as incentive compatibility, is important in auctions, in that it drives the auction
toward some point of stability.
Why do we care about stability?
Stability helps both the seller and the bidders plan better if there are repeat auc-
tions. More importantly, stability in an auction helps avoid the winner's curse, which
is an occurrence where different bidders have different values for the resources and
the bids of the other buyers are unknown.
The winner's curse usually arises in common-value auctions with imperfect infor-
mation. Assuming that it is a single-item auction (Note: This is not a sponsored-
search auction, but there are still some good takeaways), the winner in that situation
tends to overpay and actually ends up in a worse overall situation than the buyers who
did not win the auction (hence the name, winner's curse). In sponsored-search auc-
tions, you can also avoid the winner's curse by leveraging empirical data from your
account or data from similar accounts.
However, if the auction is in equilibrium, there is no winner's curse because the
bidders account for this effect in their own bids and adjust accordingly. Therefore,
each bid represents the true valuation of the resources by the buyer.
The pure Vickrey auction deals with auctions where a single good is being sold
(i.e., a
second-price
sealed-bid auction
). When multiple identical resources are for
sale, things get more complex, and one can apply the same payment principal (i.e.,
have all winning bidders pay the amount of the highest nonwinning bid). This is
known as a
uniform price auction
. Unfortunately, this situation does not result in bid-
ders bidding their true valuations in most situations, and the auction does not reach
stability.
Vickrey-Clarke-Groves (VCG) mechanism
A generalization of the Vickrey auction that maintains the incentive to bid truthfully
is known as the Vickrey-Clarke-Groves (VCG) mechanism. The idea in VCG is that
