Author(s)
Benjamin Edelman, Michael Ostrovsky and Michael Schwarz
Source
American Economic Review, Vol. 97, No. 1, pp.242-259, 2007
Summary
This paper looks at how Google sells Internet ads.
Policy Relevance
The development of methods used to sell Internet ads over time shows how markets can evolve to solve problems with auctions over time.
Main Points
- Search engines like Google and Yahoo use a new method called the “generalized second price” auction (GSP) to sell ads. Google made $3.189 billion in revenue, 98% came from GSP auctions; about 50% of Yahoo’s revenue comes from GSP auctions.
- Internet advertisers buy the keywords used by users of search engines. When the keyword is used, the search engine shows an ad. If the user clicks on the ad, the search engine gets paid. This is called “pay-per-click” pricing.
- Search engines use GSP auctions to sell the best page positions for ads to advertisers.
- Advertisers submit bids showing what they would pay per click. Software lets them revise their bids often.
- The ads are shown in decreasing order of bids, top first.
- If the user clicks an ad in position K, the advertiser pays the next highest bid, K+1.
- Some technology auctions have to be designed from scratch, like electricity and spectrum auctions. Internet auctions evolved and improved slowly in the market.
- Earlier auctions designed by Overture were unstable because advertisers revised their bids so often. The GSP reduces revision by having bidders pay what the next highest bidder bids, not the bidder’s own bid.
- GSP is similar to a Vickrey-Clarke-Groves (VCG) auction. But VCG is hard to explain to bidders; revenues would be uncertain, and bids might be lower.
- The GSP resembles a type of auction called the English auction, which is interesting because it does not tend to lead bidders to reveal what they would really pay, and the most dominant strategies do not tend to lead to stable prices.
