Allocation and Price Guarantees in an Uncertain Internet Advertising Market

49 Pages Posted: 18 Dec 2017 Last revised: 12 Jul 2018

See all articles by Maxime Cohen

Maxime Cohen

Desautels Faculty of Management, McGill University

Antoine Désir

INSEAD

Nitish Korula

Google Inc.

Balasubramanian Sivan

Google Inc., New York

Date Written: December 15, 2017

Abstract

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

Suggested Citation

Cohen, Maxime and Désir, Antoine and Korula, Nitish and Sivan, Balasubramanian, Allocation and Price Guarantees in an Uncertain Internet Advertising Market (December 15, 2017). Available at SSRN: https://ssrn.com/abstract=3088600 or http://dx.doi.org/10.2139/ssrn.3088600

Maxime Cohen (Contact Author)

Desautels Faculty of Management, McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Antoine Désir

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Nitish Korula

Google Inc. ( email )

1600 Amphitheatre Parkway
Second Floor
Mountain View, CA 94043
United States

Balasubramanian Sivan

Google Inc., New York ( email )

111 8th Ave
New York, NY 10011
United States

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