Exclusive Display in Sponsored Search Advertising

Abstract:     
As sponsored search becomes increasingly important as an advertising medium for firms, search engines are exploring more advanced bidding and ranking mechanisms to increase their revenue from sponsored search auctions. For instance, Google, Yahoo! and Bing are investigating auction mechanisms in which each advertiser submits two bids: one bid for the standard display format in which multiple advertisers are displayed, and one bid for being shown exclusively. If the exclusive-placement bid by an advertiser is high enough then only that advertiser is displayed, otherwise multiple advertisers are displayed and ranked based on their multiple-placement bids. We call such auctions two-dimensional auctions and study the GSP2D mechanism, which is an extension of the GSP mechanism and has recently been patented by Yahoo! as a key candidate for implementing two-dimensional exclusive-display auctions. In a significant advance on the existing literature on sponsored search auctions, we assume that advertisers have uncertain valuations and solve for the Bayesian Nash equilibria of the GSP and GSP2D auctions.

We find that allowing advertisers to bid for exclusivity can increase the revenue of the search engine because competition is heightened --- bidders compete not only for positions in the non-exclusive outcome but also compete for the outcome to be exclusive or non-exclusive. Interestingly, however, under certain conditions, the revenue of the search engine can decrease --- competition between outcomes leads to bidders reducing bids for their non-preferred outcome; specifically, a bidder who values the exclusive outcome highly will bid high for exclusivity and, simultaneously, bid low for non-exclusivity to increase the chance of obtaining the exclusive outcome. We also find interesting results on the bidding strategies of advertisers in GSP2D; for instance, we find that, under certain conditions, advertisers have the incentive to bid above their true valuations.

Number of Pages in PDF File: 44

Keywords: sponsored search advertising, exclusive display, game theory, position auctions, two-dimensional auctions

JEL Classification: D44, M31, M37

working papers series