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On Best-Response Bidding in GSP Auctions

19 Pages Posted: 28 Jan 2008 Last revised: 25 Oct 2012

Matthew Cary

University of Washington

Aparna Das

Brown University

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit

Ioannis Giotis

University of Washington - College of Arts and Sciences

Kurtis Heimerl

University of Washington

Anna R. Karlin

University of Washington

Claire Kenyon Mathieu

Brown University

Michael Schwarz

Yahoo! Research Labs; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 28, 2008

Abstract

How should players bid in keyword auctions such as those used by Google, Yahoo! and MSN? We model ad auctions as a dynamic game of incomplete information, so we can study the convergence and robustness properties of various strategies. In particular, we consider best-response bidding strategies for a repeated auction on a single keyword, where in each round, each player chooses some optimal bid for the next round, assuming that the other players merely repeat their previous bids. We focus on a strategy we call "Balanced Bidding" (BB). If all players use the BB strategy, we show that bids converge to a bid vector that obtains in a complete information static model proposed by Edelman et al. [4]. We prove that convergence occurs with probability 1, and we compute the expected time until convergence.

Keywords: Keyword auctions, bidding strategies, convergence

JEL Classification: C72, D44

Suggested Citation

Cary, Matthew and Das, Aparna and Edelman, Benjamin G. and Giotis, Ioannis and Heimerl, Kurtis and Karlin, Anna R. and Kenyon Mathieu, Claire and Schwarz, Michael, On Best-Response Bidding in GSP Auctions (January 28, 2008). Harvard Business School NOM Working Paper No. 08-056. Available at SSRN: https://ssrn.com/abstract=1087990 or http://dx.doi.org/10.2139/ssrn.1087990

Matthew Cary

University of Washington ( email )

Seattle, WA 98195
United States

Aparna Das

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Benjamin G. Edelman (Contact Author)

Harvard University - HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://people.hbs.edu/bedelman

Ioannis Giotis

University of Washington - College of Arts and Sciences ( email )

Seattle, WA
United States

Kurtis Heimerl

University of Washington ( email )

Seattle, WA 98195
United States

Anna R. Karlin

University of Washington ( email )

Seattle, WA 98195
United States

Claire Kenyon Mathieu

Brown University ( email )

Box 1860
Providence, RI 02912
United States

Michael Schwarz

Yahoo! Research Labs ( email )

Pasadena, CA 91103

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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