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HAL R VARIANFEBRUARY 16, 2009

PRESENTED BY : SANKET SABNIS

Online Ad Auctions

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Key Concepts

The paper basically describes how Google and other search engines sell their internet ads.

When a user sends a query to the search engine, the system finds a set of keywords that match the query and determines which ads to show and where to show them.

The expected revenue received by the search engine is the price per click times the expected number of clicks.

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Importance of Ad Quality

The interaction between the Advertiser , User and Google is shown.

The search engine wants to improve User as well as Advertiser experience so that both will come back to the search engine thereby increasing revenue.

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Auction Rules

Each advertiser a chooses a bid

The advertisers are ordered by bid times predicted click through rate

The price that advertiser a pays for a click is the minimum necessary to retain its position.

If there are fewer bidders than slots, the last bidder pays a reserve price.

Simple Auction :

Advertiser

Max Bid Cost Per Click

A $4.00 $3.00

B $3.00 $2.00

C $2.00 $1.00

D $1.00 -

Total Revenue $6.00

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Components of Ad Quality Score

Click Through Rate

Relevance

Landing Page Quality

Users vote with their clicks, which ads are more popular. Relevancy determines which ads are relevant to which

keyword. High quality landing page leads to help the users find the

information they are looking for and should have low popups and transparent in working

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Ad Rank

Advertiser Bid Quality Ad Rank

Actual Rank

A $4.00 1 4 -

B $3.00 3 9 2

C $2.00 6 12 1

D $1.00 8 8 3

Introducing the Quality of the Ad into the Ranking mechanism.

Ad Rank = Bid * Quality

Advertisers B, C, D are chosen to be displayed even though A had the highest bid.

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How much does Advertiser actually have to pay ?

(Cost Per Click)Adv = (Ad Rank)Adv below / (Quality Score) Adv

What is the Value of Quality ? If Advertiser increases quality , CPC is reduced.

Advertiser

Bid Quality

Ad Rank = Bid * Quality

CPC

A $4.00

8 32 (24) / 8 = $3.00

B $4.00

6 24 (12)/ 6 = $2.00

C $4.00

3 12 Minimum price

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Auction Methodologies

Equilibrium Methodologies All advertisers have same ad quality.

VCG ( Vickrey-Clarke-Groves) Mechanism Rank ads in same way Charge each advertiser cost that he imposes on other

advertisers. Turns out that the optimal bid is true value, no matter

what others are bidding. One problem with this algorithm is that it is

vulnerable to click fraud since an advertiser benefits from clicks on lower positions

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Bidding Behavior

Advertisers choose a single bid that will apply to many auctions.

We suppose that there is some reasonably stable relationship between an advertiser’s bid and the number of clicks that it receives during some time period.

Once an advertiser knows the cost-per-click and bid per-click function, it can determine its optimal behavior.

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Undersold Auctions

Two slots X1 = 100 clicks X2 = 80 clicks Value = .50 Reserve price = 0.05

Solve equation P1 100 = .50 x 20 + 0.05 x 80 P1 = 14 cents P2 = 5 cents Total Revenue = 0.14 x 100 + 0.05 x 80 = $18

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Oversold Auctions

Each bidder has to be indifferent between having his slot not being shown :

So ( value – prices) xs = 0prices = value

For the previous 2 – slot example , with 3 bidders prices = 50 cents

Total Revenue = .50 x 180 = $90Revenue takes a big jump when advertisers have

to compete for slotsThat is why Google’s 98% of revenue is from

Advertisement.

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Advertiser Surplus

Suppose that advertiser A is choosing some number of clicks Xa at a cost of Ca and that it decides to change its bid so that it receives some smaller number of clicks, ˆXa and pay a smaller cost ˆCa.

Determine what position, how much it would pay and how many clicks would it receive in the ad auction with this lower bid.

A 50 percent reduction in bids only results in a 12 percent reduction in costs.

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Advertiser Surplus cont...

For example, an Advertiser moving from position 4 to position 3 tends on average to increase the number of clicks by 20 percent.

Then if we observe that a particular advertiser initially receives 100 clicks in position 4, we would estimate that it would receive 120 clicks if it bid enough to move to position 3.

Ad configurations that are “fully sold”—have all the slots occupied—tend to have lower surplus than those that are “undersold.” This is because advertisers must compete for slots in the fully sold case, which tends to push their surplus down.

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Number of Ads shown

Show more adsPushes revenue up, particularly moving from

undersold to oversold, howeverThe Relevancy reduces thereby users click less in

the future and revenue decreasesOptimal choice

Depends on balancing short run profit against long run goals from current clicks to long run loss from fewer clicks

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Conclusion & Future Scope

The total value enjoyed by advertisers is between 2 and 2.3 times their total expenditure on advertisement.

The auctions have an interesting theoretical structure as well as significant practical importance.

As more economic transactions take place online we will likely see other novel pricing mechanisms arise.

Availability of real time data allows for fine tuning and constant improvement.