Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords

22 Pages Posted: 9 May 2006 Last revised: 25 Feb 2015

See all articles by Benjamin G. Edelman

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit

Michael Ostrovsky

Stanford Graduate School of Business

Michael Schwarz

Yahoo! - Yahoo! Research Labs; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2005

Abstract

We investigate the generalized second price auction (GSP), a new mechanism which is used by search engines to sell online advertising that most Internet users encounter daily. GSP is tailored to its unique environment, and neither the mechanism nor the environment have previously been studied in the mechanism design literature. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. In particular, unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP in a dynamic environment, we describe the generalized English auction that corresponds to the GSP and show that it has a unique equilibrium. This is an ex post equilibrium that results in the same payoffs to all players as the dominant strategy equilibrium of VCG.

Keywords: auctions, economic theory, microeconomics, advertising, computer industry

JEL Classification: D44, L81, L86, N37

Suggested Citation

Edelman, Benjamin G. and Ostrovsky, Michael and Schwarz, Michael, Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords (October 3, 2005). American Economic Review 97, no. 1 (March 2007): 242–259. Available at SSRN: https://ssrn.com/abstract=861164 or http://dx.doi.org/10.2139/ssrn.861164

Benjamin G. Edelman (Contact Author)

Harvard University - HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://people.hbs.edu/bedelman

Michael Ostrovsky

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States
650-724-7280 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/ostrovsky/

Michael Schwarz

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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