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  5. Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords

  • Benjamin Edelman
  • Michael Ostrovsky
  • Michael Schwarz
American Economic Review
vol. 97, no. 1, March 2007
(pp. 242–259)
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Abstract

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)

Citation

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. DOI: 10.1257/aer.97.1.242

JEL Classification

  • D44 Auctions
  • L81 Retail and Wholesale Trade; e-Commerce
  • M37 Advertising