Equilibrium Selection, Inefficiency, and Instability in Internet Advertising Auctions
27 Pages Posted: 19 Dec 2009 Last revised: 31 May 2013
Date Written: May 30, 2013
This paper studies equilibrium selection and stability in the generalized second price auction used by major search engines to sell advertisement slots. We assume that a bidder who bids randomly (noise bidder) participates in the auction with a small probability. The main finding is that the VCG-equivalent equilibria, considered plausible in this literature, do not survive in this model, even as the probability that the noise bidder appears converges to 0. An efficient equilibrium is essentially unique if it exists. This equilibrium is further justified in a model without the noise bidder as a unique limit of efficient trembling-hand perfect equilibria in which all bidders make mistakes in similar ways. However, the noise-bidder model may not have any efficient equilibrium, or even any pure strategy equilibrium. Simulations indicate that the set of parameters for which no pure strategy equilibrium exists occupies almost 99% of the parameter space if six or more positions are auctioned.
Keywords: Generalized Second Price Auction, Internet Advertising Auctions, Equilibrium Selection, Trembling-Hand Perfect Equilibrium
JEL Classification: C72, D44
Suggested Citation: Suggested Citation