FLOWER AUCTIONS IN AMSTERDAM

1. FLOWER AUCTIONS IN AMSTERDAM

2. Ad Auctions October 17, 2008

4. Overture slide

5. Motivation • Market inherently interesting • 98% of Google’s and ~50% of Yahoo’s revenues • “Future of advertising” • Unusual auction rules • Multiple units, but only one bid. Continuous time. • Structured market • Rules. Almost like a lab. Good data. • Purely electronic market • No goods ever shipped anywhere. • Flexibility to change auction rules from time to time

6. Market history & evolution

7. Generalized first price auctions Problem: Generalized first price auctions are unstable. No pure strategy equilibrium, and bids can be adjusted dynamically. Bidders want to revise their bids as often as possible.

8. Edelman and Ostrovsky, 2007 Yahoo data from June 15, 2002 to June 14, 2003 1000 top markets 10,475 bidders 18,634,347 bids Observe bids at the quarter-hour

9. Cycling Time Market Bidder Bid 6/17/2002 6:30 AM 24 13 $5.91 6/17/2002 6:30 AM 24 810 $5.92 6/17/2002 6:30 AM 24 14 $5.93 6/17/2002 6:30 AM 24 13 $5.94 6/17/2002 6:30 AM 24 60 $5.95 6/17/2002 6:30 AM 24 14 $5.96 6/17/2002 6:45 AM 24 810 $5.97 6/17/2002 6:45 AM 24 13 $5.97 … 6/17/2002 11:30 PM 24 13 $9.98 6/17/2002 11:30 PM 24 14 $9.98 6/17/2002 11:45 PM 24 14 $10.00 6/17/2002 11:45 PM 24 60 $10.00 6/17/2002 11:45 PM 24 13 $10.00 6/17/2002 11:45 PM 24 810 $10.01 6/17/2002 11:45 PM 24 14 $10.02 6/17/2002 11:45 PM 24 13 $5.12 6/17/2002 11:45 PM 24 14 $5.13

10. Cycling

11. Alternative mechanisms • Generalized first-price • Generalized second-price • Pay the bid of the next-highest bidder • First implemented by Google (2002), later adopted by Yahoo • VCG • Each bidder pays the externality he imposes on others

12. Generalized second-price auctions Position Bidder Bid 1 A $7 2 B $6 3 C $5 Payment $6.01 $5.01 $0.10

13. Computing VCG payments: example Position # clicks 1 100 2 80 Bidder Valuation C $10 A $8 B $5 C’s payment: C pushes A from 1 to 2 C pushes B out completely So C should pay $160+$400=$560  loss of surplus (100-80)*$8=$160  loss of surplus 80*$5=$400

14. GSP in use Adv Bid Payment A $3.01 $3.01 B $3.00 $2.81 C $2.80 $1.11 D $1.10

15. GSP versus Vickrey and VCG “[Google’s] unique auction model uses Nobel Prize-winning economic theory to eliminate … that feeling that you’ve paid too much.” • With only one slot, GSP is identical to standard second price auctions (Vickrey, VCG) • With multiple slots, the mechanisms differ • GSP charges bidder i the bid of bidder i+1 • VCG charges bidder i for his externality - Google marketing materials

16. Truth-telling is not a dominant strategy under GSP Intuition: Sometimes, bid below your true valuation. You may get less traffic, but you’ll earn greater profits. Suppose there are 3 bidders but 2 positions.Positions have click-through rates 100 and 80. C’s valuation: $10 bidder bid A $8 B $5 C bids $10, pays $8 → payoff ($10-$8)*100 =$200 C bids $6, pays $5 → payoff ($10-$5)*80 =$400 $400>$200. So C should place a bid below its valuation.

17. Bidders’ actual strategies