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Analyzing Frictions in Generalized Second-Price Auction Markets

Author

Listed:
  • Karthik Kannan

    (Eller College of Management, University of Arizona, Tucson, Arizona 85721)

  • Vandith Pamuru

    (Indian School of Business, Hyderabad 500 111, India)

  • Yaroslav Rosokha

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

Abstract

We investigate the role of frictions in determining the efficiency and bidding behavior in a generalized second-price auction—the most preferred mechanism for sponsored-search advertisements. In particular, we take a twofold approach of Q-learning–based computational simulations in conjunction with human-subject experiments. We find that the lower valued advertisers (who do not win the auction) exhibit highly exploratory behavior. Moreover, we find the presence of market frictions moderates this phenomenon and results in higher allocative efficiency. These results have implications for policymakers and auction-platform managers in designing incentives for more efficient auctions.

Suggested Citation

  • Karthik Kannan & Vandith Pamuru & Yaroslav Rosokha, 2023. "Analyzing Frictions in Generalized Second-Price Auction Markets," Information Systems Research, INFORMS, vol. 34(4), pages 1437-1454, December.
    • Handle: RePEc:inm:orisre:v:34:y:2023:i:4:p:1437-1454
    DOI: 10.1287/isre.2022.1187
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    References listed on IDEAS

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