American Economic Review: Vol. 97 No. 1 (March 2007)
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Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords
Edelman, Benjamin, Michael Ostrovsky, and Michael Schwarz. 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords." American Economic Review, 97(1): 242-259.
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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