Auctions of Auctions

Online advertising impressions are traded through a multitiered network of intermediaries. We model the revenue optimization of a publisher that auctions off advertising impressions to intermediary exchanges, which, in turn, run their own internal auctions among the advertisers they represent. We show that the resulting auction-of-auctions market arrangement suffers from a double marginalization problem: the multitier bid shading prompts the publisher to raise the reserve price above the level under the nonintermediated benchmark. The reserve distortion decreases channel efficiency as well as the profits of all channel members. Our findings also demonstrate that, in the auction of auctions, reserve price optimization is both more intricate and more important than in the direct mechanism: optimal reserves depend on the number of both exchanges and advertisers. Moreover, optimizing the reserve price given a fixed number of bidders may be more profitable than keeping the auction absolute and adding more bidders. Interestingly, we find that a simple scheme in which exchanges coordinate to charge their advertisers a fixed percentage commission perfectly coordinates the channel.