Optimal Keyword Auctions for Optimal User Experiences

Jun Li, De Liu, and Shulin Liu (2013). Optimal keyword auctions for optimal user experiences. Decision Support Systems, 56(2013), 450–461

44 Pages Posted: 9 Dec 2010 Last revised: 19 Jun 2014

See all articles by Jun Li

Jun Li

University of International Business and Economics (UIBE) - School of International Trade and Economics

De Liu

University of Minnesota - Twin Cities - Carlson School of Management

Shulin Liu

University of International Business and Economics - Department of Quantitative Economics

Date Written: July 20, 2013

Abstract

Poor user experiences with search advertisements can lead to ad avoidance thus reduce search engine’s long-term revenue. We capture the effect of negative user experiences on search engine’s future revenue in a new variable called “shadow costs” and examine the optimal keyword auction mechanisms (KAMs) in a general model that takes into account advertiser-specific and positionspecific shadow costs. We show that the optimal KAMs can be implemented in an ex-post equilibrium with a “progressive second price” payment rule. Furthermore, under a few special but practically relevant cases, the optimal KAM takes the form of relatively simple scoring auctions. We show that minimum bids in these scoring auctions may be advertiser- or position- specific and the allocation rule may or may not be greedy. Our results highlight impact of shadow costs on keyword auction designs and hold implications for search engines, advertisers, and Internet users.

Keywords: Internet advertising; keyword auction; mechanism design; user experience

JEL Classification: C70, D44, D82, M37

Suggested Citation

Li, Jun and Liu, De and Liu, Shulin, Optimal Keyword Auctions for Optimal User Experiences (July 20, 2013). Jun Li, De Liu, and Shulin Liu (2013). Optimal keyword auctions for optimal user experiences. Decision Support Systems, 56(2013), 450–461. Available at SSRN: https://ssrn.com/abstract=1721523 or http://dx.doi.org/10.2139/ssrn.1721523

Jun Li

University of International Business and Economics (UIBE) - School of International Trade and Economics ( email )

10 East Huixin Street
Chaoyang District
Beijing, Beijing 100029
China

De Liu (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Shulin Liu

University of International Business and Economics - Department of Quantitative Economics ( email )

10 East Huixin Street
Chaoyang District
Beijing, 100029
China

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