Information Systems Research 2009
Ex Ante Information and the Design of Keyword Auctions
Abstract
Keyword advertising, including sponsored links and contextual advertising, powers many of today's online information services such as search engines and Internet-based emails. This paper examines the design of keyword auctions, a novel mechanism that keyword advertising providers such as Google and Yahoo! use to allocate advertising slots. In our keyword auction model, advertisers bid their willingness-to-pay per click on their advertisements, and the advertising provider can weight advertisers' bids differently and require different minimum bids based on advertisers' click-generating potential. We study the impact and design of such weighting schemes and minimum-bid policies. We find that weighting scheme determines how advertisers with different click-generating potential match in equilibrium. Minimum bids exclude low-valuation advertisers and at the same time may distort the equilibrium matching. The efficient design of keyword auctions requires weighting advertisers' bids by their expected click-through-rates, and requires the same minimum weighted bids. The revenue-maximizing weighting scheme may or may not favor advertisers with low click-generating potential. The revenue-maximizing minimum-bid policy differs from those prescribed in the standard auction design literature. Keyword auctions that employ the revenue-maximizing weighting scheme and differentiated minimum bid policy can generate higher revenue than standard fixed-payment auctions. We draw managerial implications for pay-per-click and other pay-for-performance auctions and discuss potential applications to other areas.
- DOI
- 10.1287/isre.1080.0225
- Sources
- openalex