Keyword Auctions, Unit-Price Contracts, and the Role of Commitment

45 Pages Posted: 30 Jun 2008 Last revised: 25 Oct 2012

See all articles by Jianqing Chen

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Juan Feng

University of Florida - Warrington College of Business Administration

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: October 26, 2007

Abstract

Motivated by the enormous growth of keyword advertising, this paper explores the design of unit-price contract auctions, in which bidders bid their unit prices, and the winner is chosen based on both their bids and performance levels. The previous literature in unit-price contract auctions usually considers a static case where bidders' performance levels are fixed, and suggests giving preferential treatment to those bidders with low performance levels in order to promote competition. This paper extends such research by allowing bidders with lower performance levels to improve their performance at a certain cost. We examine the impact of the preferential policy on overall bidder performance, the auction efficiency, and the auctioneer's revenue, and derive the revenue-maximizing and efficient policy accordingly. Moreover, the possible upgrade in bidders' performance levels gives the auctioneer an incentive to modify the auction rules over time, as is confirmed by the practice of Yahoo! and Google. We thus compare the auctioneer's revenue-maximizing policies when she is fully committed to the auction rule and when not, and show that she should give less preferential treatment to low-performance advertisers when she is fully committed.

Keywords: Performance-base pricing, Unit-price auctions, Keyword auctions, Commitment

Suggested Citation

Chen, Jianqing and Feng, Juan and Whinston, Andrew B., Keyword Auctions, Unit-Price Contracts, and the Role of Commitment (October 26, 2007). Available at SSRN: https://ssrn.com/abstract=1151884 or http://dx.doi.org/10.2139/ssrn.1151884

Jianqing Chen (Contact Author)

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Juan Feng

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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