48 Pages Posted: 20 Apr 2017
Date Written: April 18, 2017
Search engines and many social advertising platforms use the so-called quality score to favor certain advertisers in their advertising auction. While the standard justification for quality scores is the need to provide discounts to advertisers with higher click-through rates, this work examines the role of quality score in enticing advertisers to invest in quality. The results suggest that a quality score function that rewards bidders on top of their click-through rates results in an inverted-U relationship between quality levels and incentives. Furthermore, such a quality score function may raise the auctioneer’s revenue under Generalized Second-Price auctions with more than one ad slots, but will lower the auctioneer’s revenue under VCG auctions since advertisers retain the extra surplus. We also show that while the potential revenue impact for the auctioneer depends on the bidding strategies and auction formats, there always exists a quality score function that ensures increased revenues by rewarding quality improvement. Several managerial implications for both advertisers and publishers are discussed.
Keywords: Position Auctions, Generalized Second-Price Auctions, Quality Score, Landing Page Quality, Internet Marketing, Online Advertising, Game Theory
Suggested Citation: Suggested Citation
Katona, Zsolt and Zhu, Yi, Quality Score that Makes You Invest (April 18, 2017). Available at SSRN: https://ssrn.com/abstract=2954707