On the design of sponsored keyword advertising slot auctions: An analysis of a generalized second-price auction approach

The generalized second-priceauction mechanism is commonly used in research in the context of keyword advertising slot auctioning. The mechanism sets the clearing prices for advertising slots on a search engine’s Web pages such that the advertiser will pay what was bid for the next lower advertising slot each time their own higher-ranked hyperlink is clicked. It also assigns advertising slots in the descending order of advertisers’ bid prices. Those advertisers who bid the highest prices are given the most attractive sponsored advertising slots at the top of the Web page, where the click-through rates have been shown to be the highest. We explore several issues with this auction mechanism for the sponsored keyword advertising slot context. They include: the distributional assumptions for the click-through rate; sponsored keyword advertising slot valuation over time; participation and click-stream fees and the role of a two-part tariff; alternative advertiser bidding strategies; and the design goals of sponsored keyword advertising slot auctions. We draw a number of conclusions for theory and practice.