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Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords

  • Benjamin Edelman
  • Michael Ostrovsky
  • Michael Schwarz

We investigate the "generalized second-price" (GSP) auction, a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG. (JEL D44, L81, M37)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 1 (March)
Pages: 242-259

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:242-259
Note: DOI: 10.1257/aer.97.1.242
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