Position Auctions with Budget-Constrained Advertisers
University of Southern California - Marshall School of Business
University of Minnesota - Carlson School of Management
Anthony J. Dukes
University of Southern California
July 22, 2014
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 Theoryworking papers series
Date posted: May 20, 2012 ; Last revised: August 16, 2014
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