Selling Billions of Dollars Worth of Keywords Presented By: Mitali Dhoble By Benjamin Edelman, Michael Ostrovsky And Michael Schwarz Reference:

Contents  What is Generalized Second-Price Auction(GSP)?  Structure and Evolution of Sponsored Search Auctions  Rules of GSP  GSP and Locally Envy-Free Equilibria  GSP and Generalized English Auction  Pros and Cons  Conclusion 4/25/ Generalized Second Price Auction

What we already studied in class  Search Engine Advertising  Pay-per click model  Google’s AdSense system  Click-through rates (CTR) 4/25/ Generalized Second Price Auction

GSP and what it means  An auction mechanism tailored to the unique environment of the market for online ads.  Search engines need a way to allocate positions to advertisers and auctions are a natural choice.  Commercially very successful  Over 98% of Google’s revenue in 2005 came from GSP  Over 50% of Yahoo’s revenue in 2005 came from GSP 4/25/ Generalized Second Price Auction

Simplest GSP auction  Bid per specific keyword  Form of pay-per click advertising  Advertisements are shown in decreasing order of bids  Advertiser will pay the bid amount equal to that of the advertiser one position below  Advertisers can change the bids at any given time 4/25/ Generalized Second Price Auction

The Structure and Evolution of Sponsored Search Auctions  Notable Features of the Market for Internet Advertising  Bids can be changed anytime  Search engines sell flows of perishable advertising services than storable objects  There is no unit of measurement of Internet advertisement that is natural from all the involved parties point of view 4/25/ Generalized Second Price Auction

The Structure and Evolution of Sponsored Search Auctions  Evolution of Market Institution  Early Internet Advertising  Generalized First-Price Auction  Generalized Second-Price Auctions 4/25/ Generalized Second Price Auction

Rules of GSP  For a given keyword, N objects and K bidders  α i : Expected number of clicks received by ad in position i  s k : The value per click to advertiser k  α i s k – payments = k’s payoff from being in position i  b (j) : Bid of jth highest bidder  g(j) : Identity of jth highest bidder  p (i) = α i b (i+1) : Total payment of bidder g(i)  α i (s (i) - b (i+1) ) : g(i)’s payoff 4/25/ Generalized Second Price Auction

GSP versesVCG  Each advertiser’s payment would be at least as large under GSP as under VCG, if all of them were to bid the same amounts under the 2 mechanisms.  Truth-telling is a dominant strategy under VCG  Truth-telling is not a dominant strategy under GSP 4/25/ Generalized Second Price Auction

Locally Envy-Free Equilibria Definition: An equilibrium of the simultaneous move game induced by GSP is locally envy- free if a player cannot improve his payoff by exchanging bids with the player ranked one position above him. 4/25/ Generalized Second Price Auction

Lemma 1: The outcome of any locally envy- free equilibrium of auction Г is a stable assignment. Lemma 2: If the number of advertisers is greater than the number of available positions, then any stable assignment is an outcome of a locally envy-free equilibrium of auction Г 4/25/ Generalized Second Price Auction

GSP and Generalized English Auction  Clock showing current price, which increases over time  Advertiser can drop out at any time, and his bid is the price on the clock when he drops out.  Auction ends when next-to-last advertiser drops out.  Last remaining advertiser is given the best position on screen and his payment is equal to next-to-last advertiser’s bid and so on. 4/25/ Generalized Second Price Auction

Pros  Includes many examples, theorems and proofs which make it easier to understand the concept  Along with GSP, the paper also covers in detail another strategy, namely VCG.  The detailed analysis compels the reader to contemplate the subject along various dimensions, which will lead to an improved strategy. 4/25/ Generalized Second Price Auction

Cons, Questions and Comments  Analysis is done assuming that all advertisers are identical along dimensions other than pay-per click value.  Should search engines use GSP or VCG?  How quickly do the bidders converge to an equilibrium? 4/25/ Generalized Second Price Auction

Conclusion  GSP is basically tailored for the unique Internet advertising market.  Though GSP looks very similar to the VCG mechanism, its properties and equilibrium behavior is very distinct.  The generalized English auction has a unique equilibrim:  Bid functions have explicit analytic formulaes.  The functions do not depend on bidder’s belief about each other’s types, but only on the realization of bidder’s values.  An interesting mechanism with notable features in theory as well as enormous popularity in practice, developed as a result of evolution of inefficient market institutions. 4/25/ Generalized Second Price Auction