Working Paper: NBER ID: w11765
Authors: Benjamin Edelman; Michael Ostrovsky; Michael Schwarz
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: Internet Advertising; Auction Mechanisms; Generalized Second Price Auction
JEL Codes: L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| GSP (Z28) | different outcomes than VCG (C72) |
| GSP does not have an equilibrium in dominant strategies (C72) | bidders cannot simply bid their true values (D44) |
| GSP (Z28) | unique equilibrium that yields the same payoffs as VCG (C71) |
| expected revenue for the seller in GSP (F61) | at least as high as in VCG (C70) |