On Best-Response Bidding in GSP Auctions

Abstract:     
How should players bid in keyword auctions such as those used by Google, Yahoo! and MSN? We model ad auctions as a dynamic game of incomplete information, so we can study the convergence and robustness properties of various strategies. In particular, we consider best-response bidding strategies for a repeated auction on a single keyword, where in each round, each player chooses some optimal bid for the next round, assuming that the other players merely repeat their previous bids. We focus on a strategy we call "Balanced Bidding" (BB). If all players use the BB strategy, we show that bids converge to a bid vector that obtains in a complete information static model proposed by Edelman et al. [4]. We prove that convergence occurs with probability 1, and we compute the expected time until convergence.

Keywords: Keyword auctions, bidding strategies, convergence

JEL Classifications: C72, D44

Working Paper Series