Optimal Contracts for Intermediaries in Online Advertising

55 Pages Posted: 9 Jan 2015 Last revised: 23 Jul 2016

See all articles by Santiago Balseiro

Santiago Balseiro

Columbia Business School - Decision Risk and Operations

Ozan Candogan

University of Chicago - Booth School of Business

Date Written: July 4, 2016

Abstract

In online advertising, the prevalent method advertisers employ to acquire impressions is to contract with an intermediary. These contracts involve upfront payments made by the advertisers to the intermediary, in exchange for running campaigns on their behalf. This paper studies the optimal contract offered by the intermediary in a setting where advertisers' budgets and targeting criteria are private. This problem can naturally be formulated as a multi-dimensional mechanism design problem, which in general is hard to solve. We tackle this problem by combining a performance space characterization technique, which relies on delineating the expected cost and value achievable by any feasible (dynamic) bidding policy, and a duality-based approach, which reduces the optimal contract design problem to a tractable convex optimization problem. This approach yields a crisp characterization of the intermediary's optimal bidding policy: the policy is stationary and bids a weighted average of the values associated with different types (to guarantee that the advertiser reports her type truthfully) that is appropriately shaded (to account for budget constraints). Additionally when advertisers have identical value distributions, our formulation yields a closed-form characterization of the optimal contract. Our results indicate that an intermediary can profitably provide bidding service to a budget-constrained advertiser and at the same time increase the overall market efficiency.

Keywords: Intermediary problems, mechanism design, Internet advertising, repeated auctions, budget constraints

Suggested Citation

Balseiro, Santiago and Candogan, Ozan, Optimal Contracts for Intermediaries in Online Advertising (July 4, 2016). Available at SSRN: https://ssrn.com/abstract=2546609 or http://dx.doi.org/10.2139/ssrn.2546609

Santiago Balseiro

Columbia Business School - Decision Risk and Operations ( email )

3022 Broadway
New York, NY 10027
United States

Ozan Candogan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ozan.candogan/

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