A Structural Model of Sponsored Search Advertising Auctions

A new model is developed that provides sucient conditions for existence and uniqueness of equilibria, and that bidders have substantial strategic incentives to reduce their expressed demand in order to reduce the unit prices they pay in the auctions.

Abstract

Sponsored links that appear beside Internet search results on the major search engines are sold using real-time auctions. Advertisers place standing bids, and each time a user enters a search query, the search engine holds an auction. Ranks and prices depend on advertiser bids as well as \quality scores that vary over time, by advertisement and individual user query. Existing models assume that bids are customized for a single user query. In practice queries arrive more quickly than advertisers can change their bids. This paper develops a new model that incorporates these features. In contrast to prior models, which produce multiplicity of equilibria, we provide sucient conditions for existence and uniqueness of equilibria. In addition, we propose a homotopy-based method for computing equilibria. We propose a structural econometric model. With sucient uncertainty in the environment, the valuations are point-identied; otherwise, we consider bounds on valuations. We develop an estimator which we show is consistent and asymptotically normal, and we assess the small sample properties of the estimator using Monte Carlo. We apply the model to historical data for several search phrases. Our model yields lower implied valuations and bidder prots than those suggested by the leading alternative model. We nd that bidders have substantial strategic incentives to reduce their expressed demand in order to reduce the unit prices they pay in the auctions. These incentives are asymmetric, leading to inecient allocation, which does not arise in models that ignore uncertainty. Although these are among the most competitive search phrases, bidders earn substantial prots: values per click are between 40 and 90 percent higher than prices for low-ranked bidders, but are between 90 and 270 percent higher for high-ranked bidders. Our counterfactual analysis shows that for the search phrases we study, the auction mechanism used in practice is only slightly less ecient than a Vickrey auction, but the revenue eects are ambiguous, with Vickrey leading to substantially less revenue for one search phrase and slightly more for the other. In addition, less ecient