Multi-Stage Intermediation in Display Advertising

86 Pages Posted: 18 Sep 2015 Last revised: 17 Aug 2019

See all articles by Santiago Balseiro

Santiago Balseiro

Columbia Business School - Decision Risk and Operations

Ozan Candogan

University of Chicago - Booth School of Business

Huseyin Gurkan

ESMT European School of Management and Technology

Date Written: August 17, 2019

Abstract

We consider a setting where online advertisers seek to acquire impressions from an advertising exchange through a multi-tier network of intermediaries, and study the mechanisms offered by the ad exchange and intermediaries when the advertisers’ values are private. As opposed to traditional manufacturer/retailer settings, intermediaries in display advertising auction off contingent goods that they purchase only if downstream buyers signal interest. This motivates our study of how intermediaries should bid on behalf of their customers in the mechanism of an upstream intermediary and how the structure of the intermediation network affects the profits of its participants. We provide a game-theoretic model to study the mechanisms offered by the ad exchange and intermediaries within a practically relevant class of mechanisms. We characterize a subgame perfect equilibrium of the game among the intermediaries and the seller, and show that the equilibrium mechanisms have a simple and appealing structure: intermediaries bid the virtual value associated with the maximum downstream report in the upstream intermediary’s mechanism, whenever this quantity is positive. We show that economic incentives are not necessarily aligned along the network and that the position in the intermediation network has a significant impact on the profits of the intermediaries. That is, when advertisers’ value distribution has a “light tail,” upstream intermediaries profit more (relative to downstream ones). Moreover, as the tail of the advertisers’ value distribution gets heavier, downstream intermediaries profit more, and their profits eventually exceed those of upstream ones. In addition, we show that a horizontal merger may not be profitable for intermediaries, and analyze the impact of market size on the profits of intermediaries.

Keywords: Intermediary Problems, Mechanism Design, Internet Advertising, Extensive Form Games, Second-Price Auction, Multi-Stage Intermediation

Suggested Citation

Balseiro, Santiago and Candogan, Ozan and Gurkan, Huseyin, Multi-Stage Intermediation in Display Advertising (August 17, 2019). Available at SSRN: https://ssrn.com/abstract=2661459 or http://dx.doi.org/10.2139/ssrn.2661459

Santiago Balseiro

Columbia Business School - Decision Risk and Operations ( email )

3022 Broadway
New York, NY 10027
United States

Ozan Candogan

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/

Huseyin Gurkan (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

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