An Experimental Study of Sponsored-Search Auctions

AnExperimentalStudyofSponsored-SearchAuctions⇤Yeon-KooChe†ColumbiaUniversityandYERISyngjooChoi‡UniversityCollegeLondonJinwooKim§SeoulNationalUniversityMarch2013AbstractWestudytheGeneralizedSecondPriceauctions—astandardmethodforallocat-ingonlinesearchadvertising—experimentally,consideringboththestaticenvironmentassumedbytheprevailingtheoryandadynamicgamecapturingthesalientaspectsofreal-worldsearchadvertisingauctions.Subjectsofourexperimentbidconsistentlywiththeleadingequilibriumnotions,butexhibitsignificantoverbiddingrelativetotheVickrey-Clarke-Groves(VCG)outcomefavoredasanequilibriumselectioninthelit-erature.Theobservedbiddingbehavioriswellexplainedbyamodelthatexplicitlyaccountsforthestrategicuncertaintyfacingabidder,whichsuggestsstrategicuncer-taintyasasourceoftheobserveddeparturefromtheVCGoutcome.Meanwhile,the⇤WearegratefultoJacobandMichelleGoeree,JohnKagel,DanLevin,MichaelOstrovsky,MichaelSchwarz,YanChen,andtheparticipantsattheAMMA2011,MonashUniversity,OhioStateUniversity,UniversityofEastAnglia,UniversityofMichigan,UniversitatPompeuFabra,UniversityofZurich,andtheWCUMarketDesignConferenceheldatYonseiUniversityinAugust2010,forvaluablecomments,andtoBrianWallaceforwritingtheexperimentalprogram,andtoTomRutterforhelpingusruntheexperiment.CheandKimacknowledgethesupportbyWCUprogramthroughtheNationalResearchFoundationofKoreafundedbytheMinistryofEducation,ScienceandTechnology(R32-2008-000-10056-0).ChoiacknowledgestheEconomicandSocialResearchCouncil(UK)GrantNo.RES-061-25-0348andviatheELSEforfinancialsupport.†DepartmentofEconomics,ColumbiaUniversity,420West118thSt,10161AB,NewYork,NY10027,USA(Email:[e-mail],URL:˜yc2271).‡DepartmentofEconomics,UniversityCollegeLondon,GowerStreet,LondonWC1E6BT,UK(Email:[e-mail],URL:˜uctpsc0).§DepartmentofEconomics,SeoulNationalUniversity,1Gwanak-roGwanak-gu,Seoul151-742,SouthKorea(Email:[e-mail],URL:).1observedbiddingbehaviorinthedynamicgameresemblesthebehaviorinthestaticgame.Ouranalysisthuslendssupporttotheuseofastaticgameasmodelingproxy,butcallsintoquestiontheprevailingequilibriumselection.JELClassification:C92,D44,M3.Keywords:onlineadvertising,sponsoredsearchauction,generalizedsecondpriceauction,experiment.1IntroductionSearchenginessuchasGoogle,Yahoo!andMicrosoftsellonlinesearchspacestoadvertisers.Incomparisonwithconventionaladvertising,onlinesearchadvertisingishighlytargetable,andthusisane↵ectivemeansforfindingbuyers.Naturally,thesponsoredsearchauctionshavebecomeamajorrevenuesourceforsearchfirms.In2007,searchadvertisingaccountedformorethan$100billionofrevenueforsearchfirms.1Theauctionformatusedforsellingadspaceshasevolved,withafewadjustmentsalongtheway,towhatisnowknownasthegeneralizedsecondprice(GSP)auctions.UndertheGSP,advertisersbidper-clickprices,andthesebidsareconvertedintoper-impressionbids—theirper-clickbidsmultipliedbytheestimatedclickthroughrates—tode-terminetheassignmentofadpositions.Specifically,thehighestbidder(inper-impressionbid)isassignedthetopposition,thesecond-highestbidderisassignedthenextbest,andsoon.Awinnerofeachadpositionthenpaysthesmallestpriceperclickthatwouldhavewonthatposition.Ifthenumberofclicksdependsonlyonone’sposition,asisoftenassumed,per-impressionbidsessentiallycoincidewithper-clickbids,soeachwinningbiddersimplypaysaper-clickpricethatequalsthebidsubmittedbythenext-highestbidder.TheprevailingtheoryconsiderstheGSPinastaticmodelinwhichadvertisersbidsimulta-neouslywithcompleteinformationaboutothers’preferences(Edelmanetal.,2007,henceforthEOS;andVarian,2007).EOSandVarianthenfocusonaclassofNashequilibria,calledlocallyenvy-freeorsymmetric,inwhichnobidderwishestoexchangehiswinningpositionandtheassociatedpricewithothers’positionsandthepricestheyarepayingforthem.TheSymmet-ricNashEquilibrium(SNE)conceptpredictsecientallocationofadpositionsbutadmitsaplethoraofequilibriumprices,includingthosethatwouldobtainiftheVickrey-Clarke-Groves(VCG)mechanismwereemployed.ThisVCGequilibriumisthemostpreferredbybiddersamongallSNE’s,andissuggestedasthemostplausible.21Specifically,over90%ofGoogle’srevenueand50%ofYahoo!andMS’srevenuesweregeneratedfromtheplacementofkeywordsponsoredsearchads.2SeeSection2forseveralargumentsthathavebeenmadeintheliteratureinsupportofselectingtheVCG2WhilethetheoryprovidesusefulinsightsonGSPauctions,itraisestwoissues.First,un-likethetheory,sponsored-searchauctionsinpracticetakeplacecontinuouslyinrealtime—inprinciple,wheneverausertypesinasearchquery—andalsobiddersareunlikelytohavecom-pleteinformationaboutoneanother’spreferences.Thismeansthatadvertisersfacecomplexdynamicinteractionswhichmayprovidethemwithopportunitiestolearnandadjusttheirbe-haviorovertime.Theactualpracticeisthereforebestdescribedbyadynamicgameinwhichbidderswithincompleteinformationplayrepeatedlyovertime.Itisunclearwhetherthestaticcompleteinformationmodelcanadequatelyrepresentthisrichdynamicenvironment.Second,thetheorylacksasharppredictionduetothemultiplicityofequilibria.