Competing Ad Auctions
HBS Negotiations, Organizations and Markets Unit
Benjamin G. Edelman
Harvard University - HBS Negotiations, Organizations and Markets Unit
Hoan Soo Lee
Tsinghua University - School of Economics & Management
September 27, 2013
Harvard Business School NOM Unit Working Paper No. 10-055
We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: We derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.
Number of Pages in PDF File: 26
Date posted: January 12, 2010 ; Last revised: September 28, 2013
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