How Good is the Generalized Second-Price Mechanism?

Proceedings of 20th Workshop on Information Technologies and Systems, 2010

6 Pages Posted: 2 Jan 2011

See all articles by Linjing Li

Linjing Li

Chinese Academy of Sciences (CAS) - Institute of Automation

Daniel Dajun Zeng

University of Arizona - Department of Management Information Systems

Paulo Goes

University of Arizona - Department of Management Information Systems

Date Written: December 13, 2010

Abstract

The generalized second-price (GSP) mechanism is the dominant auction format used in online keyword auctions. From the viewpoint of mechanism design, however, the GSP mechanism is not optimal in the sense that it is not incentive compatible and does not result in revenue maximization. This raises important questions of significant practical relevance: How effective is the GSP mechanism? Do better auction mechanisms for keyword advertising exist? This paper aims to offer analytical insights to answer these questions partially. We consider the entire set of linear payment mechanisms and develop a new notion of weak revenue equivalence to compare these linear mechanisms. Our key result indicates that the GSP mechanism can achieve the best performance within the linear mechanism space and suggests that more complex non-linear mechanisms are needed if search engines want to further increase their revenue.

Keywords: GSP, VCG, Mechanism Design, Weak Revenue Equivalence, Keyword Auction

JEL Classification: C78, D44, M37

Suggested Citation

Li, Linjing and Zeng, Daniel Dajun and Goes, Paulo, How Good is the Generalized Second-Price Mechanism? (December 13, 2010). Proceedings of 20th Workshop on Information Technologies and Systems, 2010 . Available at SSRN: https://ssrn.com/abstract=1733506

Linjing Li (Contact Author)

Chinese Academy of Sciences (CAS) - Institute of Automation ( email )

Beijing, 100190
China

Daniel Dajun Zeng

University of Arizona - Department of Management Information Systems ( email )

AZ
United States

Paulo Goes

University of Arizona - Department of Management Information Systems ( email )

AZ
United States

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