Allocation and Price Guarantees in an Uncertain Internet Advertising Market
49 Pages Posted: 18 Dec 2017 Last revised: 12 Jul 2018
Date Written: December 15, 2017
Buying display ad impressions via auctions in Internet advertising exchanges comes with significant allocation and price uncertainties. In this paper, we consider the problem of designing a contract to mitigate this risk. In particular, we formally study how risk aversion affects the desire for guarantees, and their pricing. We propose to augment the traditional second-price auction with a programmatic purchase option (which we call a Market-Maker contract) that removes both allocation and price uncertainties. It allows advertisers to secure impressions in advance by paying a premium while enjoying allocation and price guarantees. We first prove that the second-price auction remains truthful under the risk-aversion utility models we consider. We then rigorously analyze the equilibrium outcome in the presence of a Market-Maker contract and show that it yields a Pareto improvement in the seller's revenue and in the sum of advertisers' utilities. Finally, through computations based on popular valuation distributions, we illustrate the seller's revenue and advertisers' utilities improvements obtained by adding a Market-Maker contract in display advertising.
Keywords: Online ads, guaranteed contracts, risk aversion, auctions, revenue management
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