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Quality Score that Makes You Invest

48 Pages Posted: 20 Apr 2017  

Zsolt Katona

University of California, Berkeley - Haas School of Business

Yi Zhu

University of Minnesota - Carlson School of Management

Date Written: April 18, 2017

Abstract

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

Katona, Zsolt and Zhu, Yi, Quality Score that Makes You Invest (April 18, 2017). Available at SSRN: https://ssrn.com/abstract=2954707 or http://dx.doi.org/10.2139/ssrn.2954707

Zsolt Katona

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Yi Zhu (Contact Author)

University of Minnesota - Carlson School of Management ( email )

321 - 19th Ave. South, Suite 3-150
Minneapolis, MN 55455
United States

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