Information Systems Research, Vol. 21, No. 1, pp. 133-153, 2010
38 Pages Posted: 30 Nov 2006 Last revised: 22 Oct 2012
Date Written: November 1, 2006
This paper discusses a class of auctions, weighted unit-price auctions (WUPAs), which capture key features of keyword auctions, a novel mechanism behind the multi-billion-dollar keyword advertising industry. We analyze the equilibrium bidding strategy in the WUPA class and study its two main design parameters - weighting factors and minimum bids - both of which make use of the auctioneer's ex-ante information on bidders' ability to generate outcomes. Our results indicate equilibrium bidding functions in WUPAs may have kinks and jumps. WUPAs can be efficient when an auctioneer weights unit-price bids by bidders' expected yield and imposes the same minimum score (but not the same minimum bid-price) across all bidders. Optimally weighted WUPAs can generate more revenue than generalized first-price auctions, and optimal minimum bids generally differ from those prescribed in the mechanism design literature.
Keywords: keyword advertising, weighted unit-price auctions, ex-ante information, score rule, Google and Yahoo
Suggested Citation: Suggested Citation
Liu, De and Chen, Jianqing and Whinston, Andrew B., Ex Ante Information and the Design of Keyword Auctions (November 1, 2006). Information Systems Research, Vol. 21, No. 1, pp. 133-153, 2010. Available at SSRN: https://ssrn.com/abstract=948310