On the optimal number of advertising slots in a generalized second-price auction
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On the optimal number of advertising slots in a generalized second-price auction Alex Kim & Subramanian Balachander & Karthik Kannan
Published online: 21 June 2012 # Springer Science+Business Media, LLC 2012
Abstract In search advertising, a search engine uses a generalized second-price auction to sell advertising slots adjacent to search results on its webpage. In this paper, we study an interesting question related to the design of the generalized second-price auction: how should a search engine strategically decide on the number of advertising slots? To answer this question, we analyze the implication of varying the number of slots in a base model in which the click-through rates are assumed to be independent of the number of slots. When deciding the number of slots, we find that a search engine’s profit is based on two counteracting factors: the incremental clicks from an extra slot and the influence of the extra slot on advertisers’ payments per click. Our analysis characterizes the conditions for optimality of the number of slots and the implications of different distributions for advertiser valuations. We also extend the base model to allow for attraction and cannibalization of clicks from existing slots by new ad slots and show how such effects affect the optimal number of slots. Our overall results show that search engines need to optimize the number of ad slots offered for auction in order to maximize profit. Keywords Auctions . Search advertising . Generalized second-price auction . Online advertising
A. Kim College of Management, Long Island University, Brookville, NY 11548, USA e-mail: [email protected] S. Balachander (*) : K. Kannan Krannert Graduate School of Business, Purdue University, West Lafayette, IN 47907, USA e-mail: [email protected] K. Kannan e-mail: [email protected]
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Mark Lett (2012) 23:851–868
1 Introduction Search advertising has grown to become a significant advertising medium in the online world. The spending on online search ads grew at a rate of more than 20 % from 2007 to 2008, which is significantly higher than the increase in traditional media advertising (eMarketer 2009). Search advertising originates when a consumer uses a keyword on a search engine website to search the internet. Because the keyword reveals the consumer’s potential interest in associated products or services, the search engine invites bids on the keyword from advertisers for the right to have their ads displayed alongside the organic search results. Typically, more than one advertiser’s ad is displayed based on the results of a generalized second-price (GSP) auction. Different from traditional ad channels (e.g., TV or billboard ads), an advertiser pays the search engine only when a consumer clicks on his or her ad. The slots on the webpage where individual ads are displayed vary in their propensity to be clicked by consumers. Therefore, there is competition among advertisers to be featured in the more attractive slots. The search engine decides on advertiser slot assignments and the payments per cli
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