Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords
📜 Abstract
This paper compares and contrasts the auction used in Internet advertising with the auction used by economists to sell postage stamps. We then describe a formulation of the Internet advertising auction as a modified second-price auction, which turns out to have many desirable properties from the perspective of buyers and sellers. We show that the auction has a unique equilibrium point that is efficient and that the revenues from the Internet advertising auction are equivalent to a Vickrey auction under certain conditions.
✨ Summary
This paper presents a comprehensive analysis of the auction mechanisms employed in internet advertising, particularly focusing on the Generalized Second-Price Auction (GSP) model. The authors, Hal Varian and Michael Schwartz, explore the parallels between the GSP auction and the traditional Vickrey auction, identifying a unique equilibrium point and demonstrating the efficiency and desirable outcomes from both bidder and seller perspectives.
The authors highlight the importance of these auctions in the context of online advertising and search engines, describing how billions of dollars worth of keywords are traded through this mechanism. The theoretical insights in this paper contribute to understanding the economic underpinnings of digital advertising markets.
Upon reviewing citations and references, little to no direct academic follow-up research citing this specific paper was found, which suggests a more isolated impact or use primarily within proprietary industry frameworks. Varian’s significant role at Google may imply practical influence in how the GSP auctions are executed in major online platforms, though this is not widely documented in publicly available follow-up literature.