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Simplified Mechanisms with an Application to Sponsored-Search Auctions

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  • Paul Milgrom

    (Stanford University)

Abstract

A mechanism can be simplified by restricting its message space. If the restricted message space satisfies a certain “outcome closure property,” then the simplification is “tight”: for every S=0 any Nash equilibrium of the simplified mechanism is also an Nash equilibrium of the unrestricted mechanism. Prominent auction and matching mechanisms are tight simplifications of mechanisms studied in economic theory and often incorporate price-adjustment features that facilitate simplification. The generalized second price auction used for sponsored-search advertising is a tight simplification of a series of second-price auctions that eliminates the lowest revenue equilibrium outcomes and leaves intact only higher revenue equilibria.

Suggested Citation

  • Paul Milgrom, 2008. "Simplified Mechanisms with an Application to Sponsored-Search Auctions," Discussion Papers 08-013, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:08-013
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    References listed on IDEAS

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    More about this item

    Keywords

    sponsored search; generalized second-price auctions; mechanism design;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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