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Ex Ante Information and the Design of Keyword Auctions

Information Systems Research, Vol. 21, No. 1, pp. 133-153, 2010

38 Pages Posted: 30 Nov 2006 Last revised: 22 Oct 2012

De Liu

University of Minnesota - Twin Cities - Carlson School of Management

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: November 1, 2006

Abstract

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

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

De Liu (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Jianqing Chen

The University of Texas at Dallas, Jindal School of Management ( email )

800 West Campbell Road
Richardson, TX 75080
United States

Andrew Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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