Abstract

http://ssrn.com/abstract=2062980
 


 



Position Auctions with Budget-Constrained Advertisers


Shijie Lu


University of Southern California - Marshall School of Business

Yi Zhu


University of Minnesota - Carlson School of Management

Anthony J. Dukes


University of Southern California

July 22, 2014


Abstract:     
This paper examines position auctions with budget-constrained advertisers – a dominant bidding environment used by publishers to allocate positions in online advertising. As we show, budget constraints play a crucial role in bidding strategy. We provide a comprehensive analysis of this auction and identify three new categories of bid strategies used by advertisers in equilibrium (i) aggressive: bid jamming; (ii) defensive: jamming protection; and (iii) semi-aggressive: budget pegging. We then examine the implication of budget sizes on advertisers’ profits and the publisher’s revenues. There exists a situation in which an advertiser’s profit strictly decreases with her budget. In addition, the publisher’s revenue can decrease when an advertiser’s budget increases. This happens whenever a budget increase (i) reduces the aggressiveness of bidding strategies or (ii) induces the high-value advertiser to bid for a higher position. In an extension, we consider advertisers’ budget decisions being endogenous and discover an inverted-U relationship between the publisher’s revenue and the opportunity cost of advertising budgets. Several managerial implications for both advertisers and publishers are discussed.

Number of Pages in PDF File: 57

Keywords: Advertising, Budget Constraints, Position Auctions, Internet Marketing, Game Theory

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Date posted: May 20, 2012 ; Last revised: August 16, 2014

Suggested Citation

Lu, Shijie and Zhu, Yi and Dukes, Anthony J., Position Auctions with Budget-Constrained Advertisers (July 22, 2014). Available at SSRN: http://ssrn.com/abstract=2062980 or http://dx.doi.org/10.2139/ssrn.2062980

Contact Information

Shijie Lu (Contact Author)
University of Southern California - Marshall School of Business ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
Yi Zhu
University of Minnesota - Carlson School of Management ( email )
321 - 19th Ave. South, Suite 3-150
Minneapolis, MN 55455
United States
Anthony J. Dukes
University of Southern California ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
213-740-3846 (Phone)
HOME PAGE: http://www-bcf.usc.edu/~dukes/
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