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FLOWER AUCTIONS IN AMSTERDAM

FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

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Page 1: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

FLOWER AUCTIONS IN AMSTERDAM

Page 2: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Ad Auctions

March 7, 2008

Page 3: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008
Page 4: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Overture slide

Page 5: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Motivation

• Market inherently interesting– 98% of Google’s and ~50% of Yahoo’s revenues– “Future of advertising”

• Unusual auction rules– Multiple units, but only one bid. Continuous time.

• Structured market– Rules. Almost like a lab. Good data.

• Purely electronic market– No goods ever shipped anywhere.

• Flexibility to change auction rules from time to time

Page 6: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Market history & evolution

early banner ads (circa 1994)

Overture (Goto.com) (1997)

per-impression pricing per-click pricing

limited targeting keyword targeting

person-to-person negotiations

automated acceptance of revised bids

generalized first-price auction rules

Page 7: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Generalized first price auctions

Problem: Generalized first price auctions are unstable.

No pure strategy equilibrium, and bids can be adjusted dynamically. Bidders want to revise their bids as often as possible.

Page 8: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Edelman and Ostrovsky, 2007

Yahoo data from June 15, 2002 to June 14, 2003

1000 top markets

10,475 bidders

18,634,347 bids

Observe bids at the quarter-hour

Page 9: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

CyclingTime Market Bidder Bid6/17/2002 6:30 AM 24 13 $5.916/17/2002 6:30 AM 24 810 $5.926/17/2002 6:30 AM 24 14 $5.936/17/2002 6:30 AM 24 13 $5.946/17/2002 6:30 AM 24 60 $5.956/17/2002 6:30 AM 24 14 $5.966/17/2002 6:45 AM 24 810 $5.976/17/2002 6:45 AM 24 13 $5.97 …6/17/2002 11:30 PM 24 13 $9.986/17/2002 11:30 PM 24 14 $9.986/17/2002 11:45 PM 24 14 $10.006/17/2002 11:45 PM 24 60 $10.006/17/2002 11:45 PM 24 13 $10.006/17/2002 11:45 PM 24 810 $10.016/17/2002 11:45 PM 24 14 $10.026/17/2002 11:45 PM 24 13 $5.126/17/2002 11:45 PM 24 14 $5.13

Page 10: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Cycling

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Page 11: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Alternative mechanisms

• Generalized first-price

• Generalized second-price– Pay the bid of the next-highest bidder– First implemented by Google (2002),

later adopted by Yahoo

• VCG– Each bidder pays the externality he

imposes on others

Page 12: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Generalized second-price auctions

Position Bidder Bid

1 A $7

2 B $6

3 C $5

Payment

$6.01

$5.01

$0.10

Page 13: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Computing VCG payments: example

Position # clicks

1 100

2 80

Bidder Valuation

A $8 B $5

C $10

C’s payment:

C pushes A from 1 to 2

C pushes B out completely

So C should pay $160+$400=$560

loss of surplus (100-80)*$8=$160

loss of surplus 80*$5=$400

Page 14: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

GSP in use

Adv Bid Payment

A $3.01 $3.01

B $3.00 $2.81

C $2.80 $1.11

D $1.10

Page 15: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

GSP versus Vickrey and VCG

• With only one slot, GSP is identical to standard second price auctions (Vickrey, VCG)

• With multiple slots, the mechanisms differ– GSP charges bidder i the bid of bidder i+1– VCG charges bidder i for his externality

“[Google’s] unique auction model uses Nobel Prize-winning economic theory to eliminate … that feeling that you’ve paid too much.”

- Google marketing materials

Page 16: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Truth-telling is not a dominant strategy under GSP

Intuition: Sometimes, bid below your true valuation. You may get less traffic, but you’ll earn greater profits.

bidder bid

A $8

B $5

C’s valuation: $10

C bids $10, pays $8 → payoff ($10-$8)*100 =$200

C bids $6, pays $5 → payoff ($10-$5)*80 =$400

Suppose there are 3 bidders but 2 positions.Positions have click-through rates 100 and 80.

$400>$200. So C should place a bid below its valuation.

Page 17: FLOWER AUCTIONS IN AMSTERDAM. Ad Auctions March 7, 2008

Bidders’ actual strategies