Equilibrium Selection and Inefficiency in Internet Advertising Auctions

Abstract:     
This paper proposes two approaches to select a plausible equilibrium in the generalized second price auction. The first approach is using variants of trembling-hand perfect equilibrium, and the second is introducing an irrational player. Both have the almost same prediction, and it is different from the prediction made by Edelman, Ostrovsky and Schwarz (2007). Also, this paper find that GSP may not have an efficient equilibrium which is plausible according to this paper's criterion. According to a simulation, in most cases GSP does not have an efficient and plausible equilibrium.

Keywords: Generalized Second Price Auction, Position Auction, Internet Advertising Auction

Working Paper Series