On the Optimal Number of Advertising Slots in a Generalized Second-Price Auction

Marketing Letters, 23:851–868

Posted: 22 Aug 2012

See all articles by Alex Kim

Alex Kim

Long Island University, C.W. Post Campus, College of Management

Subramanian Balachander

University of California, Riverside - School of Business Administration

Karthik Natarajan Kannan

Purdue University

Date Written: June 1, 2012

Abstract

In search advertising, a search engine uses a generalized second-price auction to sell advertising slots adjacent to search results on its webpage. In this paper, we study an interesting question related to the design of the generalized second-price auction: how should a search engine strategically decide on the number of advertising slots? To answer this question, we analyze the implication of varying the number of slots in a base model in which the click-through rates are assumed to be independent of the number of slots. When deciding the number of slots, we find that a search engine’s profit is based on two counteracting factors: the incremental clicks from an extra slot and the influence of the extra slot on advertisers’ payments per click. Our analysis characterizes the conditions for optimality of the number of slots and the implications of different distributions for advertiser valuations. We also extend the base model to allow for attraction and cannibalization of clicks from existing slots by new ad slots and show how such effects affect the optimal number of slots. Our overall results show that search engines need to optimize the number of ad slots offered for auction in order to maximize profit.

Keywords: Auctions, Search advertising, Generalized second-price auction, Online advertising

JEL Classification: D44, M37

Suggested Citation

Kim, Alex and Balachander, Subramanian and Kannan, Karthik Natarajan, On the Optimal Number of Advertising Slots in a Generalized Second-Price Auction (June 1, 2012). Marketing Letters, 23:851–868, Available at SSRN: https://ssrn.com/abstract=2132527

Alex Kim

Long Island University, C.W. Post Campus, College of Management ( email )

720 Northern Blvd.
Brookville, NY 11548-0570
United States

Subramanian Balachander (Contact Author)

University of California, Riverside - School of Business Administration ( email )

United States

Karthik Natarajan Kannan

Purdue University ( email )

Krannert School of Management
West Lafayette, IN 47907
United States

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