Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords
Michael Ostrovsky, and
Michael Schwarz. 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords."
American Economic Review,
We investigate the "generalized second-price" (GSP) auction, a new mechanism
used by search engines to sell online advertising. Although GSP looks similar to the
Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different.
Unlike the VCG mechanism, GSP generally does not have an equilibrium in
dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze
the properties of GSP, we describe the generalized English auction that corresponds
to GSP and show that it has a unique equilibrium. This is an ex post
equilibrium, with the same payoffs to all players as the dominant strategy
equilibrium of VCG. (JEL D44, L81, M37)
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