Adverse Selection and Auction Design for Internet Display Advertising

28 Pages Posted: 8 May 2015 Last revised: 17 Jun 2016

Nick Arnosti

Columbia Business School - Decisions, Risk, and Operations Division

Marissa Beck

Stanford University - Department of Economics

Paul R. Milgrom

Stanford University

Date Written: May 1, 2016

Abstract

We model an online display advertising environment in which "performance'' advertisers can measure the value of individual impressions, whereas "brand" advertisers cannot. If advertiser values for ad opportunities are positively correlated, second-price auctions for impressions can be inefficient and expose brand advertisers to adverse selection. Bayesian-optimal auctions have other drawbacks: they are complex, introduce incentives for false-name bidding, and do not resolve adverse selection. We introduce "modified second bid" auctions as the unique auctions that overcome these disadvantages.

When advertiser match values are drawn independently from heavy tailed distributions, a modified second bid auction captures at least 94.8% of the first-best expected value. In that setting and similar ones, the benefits of switching from an ordinary second-price auction to the modified second bid auction may be large, and the cost of defending against shill bidding and adverse selection may be low.

Keywords: auctions, mechanism design, adverse selection

JEL Classification: D44, D82

Suggested Citation

Arnosti, Nick and Beck, Marissa and Milgrom, Paul R., Adverse Selection and Auction Design for Internet Display Advertising (May 1, 2016). Available at SSRN: https://ssrn.com/abstract=2603336 or http://dx.doi.org/10.2139/ssrn.2603336

Nick Arnosti (Contact Author)

Columbia Business School - Decisions, Risk, and Operations Division ( email )

3022 Broadway
New York, NY 10027
United States

Marissa Beck

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Paul R. Milgrom

Stanford University ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
+1-650-723-3397 (Phone)
+1-419-791-8545 (Fax)

HOME PAGE: www.milgrom.net

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