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Adverse Selection and Auction Design for Internet Display Advertising

Author

Listed:
  • Nick Arnosti
  • Marissa Beck
  • Paul Milgrom

Abstract

We model an online display advertising environment in which "performance" advertisers can measure the value of individual impressions, whereas "brand" advertisers cannot. If advertiser values for ad opportunities are positively correlated, second-price auctions for impressions can be inefficient and expose brand advertisers to adverse selection. Bayesian-optimal auctions have other drawbacks: they are complex, introduce incentives for false-name bidding, and do not resolve adverse selection. We introduce "modified second bid" auctions as the unique auctions that overcome these disadvantages. When advertiser match values are drawn independently from heavy-tailed distributions, a modified second bid auction captures at least 94.8 percent of the first-best expected value. In that setting and similar ones, the benefits of switching from an ordinary second-price auction to the modified second bid auction may be large, and the cost of defending against shill bidding and adverse selection may be low.

Suggested Citation

  • Nick Arnosti & Marissa Beck & Paul Milgrom, 2016. "Adverse Selection and Auction Design for Internet Display Advertising," American Economic Review, American Economic Association, vol. 106(10), pages 2852-2866, October.
    • Handle: RePEc:aea:aecrev:v:106:y:2016:i:10:p:2852-66
    Note: DOI: 10.1257/aer.20141198
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    References listed on IDEAS

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    1. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
    2. Yokoo, Makoto & Sakurai, Yuko & Matsubara, Shigeo, 2004. "The effect of false-name bids in combinatorial auctions: new fraud in internet auctions," Games and Economic Behavior, Elsevier, vol. 46(1), pages 174-188, January.
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    Citations

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    Cited by:

    1. Alexander Teytelboym & Shengwu Li & Scott Duke Kominers & Mohammad Akbarpour & Piotr Dworczak, 2021. "Discovering Auctions: Contributions of Paul Milgrom and Robert Wilson," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(3), pages 709-750, July.
    2. Omid Rafieian, 2023. "Optimizing User Engagement Through Adaptive Ad Sequencing," Marketing Science, INFORMS, vol. 42(5), pages 910-933, September.
    3. Santiago R. Balseiro & Ozan Candogan & Huseyin Gurkan, 2021. "Multistage Intermediation in Display Advertising," Manufacturing & Service Operations Management, INFORMS, vol. 23(3), pages 714-730, May.
    4. Hana Choi & Carl F. Mela & Santiago R. Balseiro & Adam Leary, 2020. "Online Display Advertising Markets: A Literature Review and Future Directions," Information Systems Research, INFORMS, vol. 31(2), pages 556-575, June.
    5. Daniel Fershtman & Alessandro Pavan, 2022. "Matching auctions," RAND Journal of Economics, RAND Corporation, vol. 53(1), pages 32-62, March.
    6. Manmohan Aseri & Milind Dawande & Ganesh Janakiraman & Vijay Mookerjee, 2018. "Procurement Policies for Mobile-Promotion Platforms," Management Science, INFORMS, vol. 64(10), pages 4590-4607, October.
    7. Bergemann, Dirk & Heumann, Tibor & Morris, Stephen, 2021. "Selling Impressions: Efficiency vs. Competition," CEPR Discussion Papers 16402, C.E.P.R. Discussion Papers.
    8. Santiago Balseiro & Anthony Kim & Mohammad Mahdian & Vahab Mirrokni, 2021. "Budget-Management Strategies in Repeated Auctions," Operations Research, INFORMS, vol. 69(3), pages 859-876, May.
    9. Tim Roughgarden & Inbal Talgam-Cohen, 2018. "Approximately Optimal Mechanism Design," Papers 1812.11896, arXiv.org, revised Aug 2020.
    10. Tommaso Bondi & Omid Rafieian, 2023. "Privacy and Polarization: An Inference-Based Approach," Working Papers 23-09, NET Institute.
    11. Thomas W. Frick & Rodrigo Belo & Rahul Telang, 2023. "Incentive Misalignments in Programmatic Advertising: Evidence from a Randomized Field Experiment," Management Science, INFORMS, vol. 69(3), pages 1665-1686, March.
    12. Alison Watts, 2018. "Generalized Second Price Auctions over a Network," Games, MDPI, vol. 9(3), pages 1-11, September.
    13. Robert Zeithammer, 2019. "Soft Floors in Auctions," Management Science, INFORMS, vol. 65(9), pages 4204-4221, September.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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