Optimal reserve prices in weighted GSP auctions

•We show how to determine the optimal reserve price of the weighted GSP mechanism in Bayesian settings.•We prove that the wGSP auction with this discriminatory re-serve price is a Myerson optimal auction.•This optimal reserve price can be extended to support CPA/CPC/CPM hybrid auction.•Our simulations indicate that setting a proper reserve price will make bidders transfer surplus to payment.•We describe a practical implementation method to compute optimal reserve prices in production systems.

Most search engines use the weighted Generalized Second Price (wGSP) auction to sell keyword-based text ads, generating billions of dollars of advertising revenue every year. Designing and implementing near-optimal reserve prices for these wGSP auctions are naturally important problems for both academia and industry.In this paper, we show how to calculate and implement the near-optimal reserve price of the wGSP mechanism in realistic settings. Unlike reserve prices in standard single-item auctions, optimal reserve prices in wGSP auctions are discriminatory, different even for advertisers bidding on the same keyword. The optimal reserve price results can be extended to support CPA/CPC/CPM1 hybrid auctions.Our simulations indicate that setting a proper reserve price will transfer some bidder utility (payoff) to auctioneer utility, resulting in higher revenue for the search engine. We describe a practical methodology to implement optimal reserve prices in production systems.