Optimal auction design in two-sided markets

A key feature of online markets for advertising (e.g., sponsored links) is that clicking rates depend on the searchers' expectations that the platform selects relevant advertisers. This article studies auction design by a platform that maximizes profits in the long run, where clicking rates are...

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Bibliographic Details
Published inThe Rand journal of economics Vol. 45; no. 2; pp. 248 - 272
Main Author Gomes, Renato
Format Journal Article
LanguageEnglish
Published Santa Monica Blackwell Publishing Ltd 01.06.2014
Wiley Periodicals, Inc
Wiley Subscription Services, Inc
Rand Corporation
Subjects
Advertising
Advertising rates
Analysis
Auction markets
Auctions
Cross subsidization
Design
Economic rent
Economic theory
Electronic commerce
Hyperlinks
Information relevance
Information technology
Internet
Internet/Web advertising
Internet/Web search services
Local advertising
Market analysis
Marketing industry
Pay
Search engines
Searches
Sponsored search
Studies
Technology application
United States
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Summary:A key feature of online markets for advertising (e.g., sponsored links) is that clicking rates depend on the searchers' expectations that the platform selects relevant advertisers. This article studies auction design by a platform that maximizes profits in the long run, where clicking rates are mechanism dependent. In line with the practice of the major search engines, the revenue-maximizing mechanism is a scoring auction that combines the willingness to pay and the relevance to searchers of advertisers. By trading offrent extraction and clicking volume, this mechanism works as a cross-subsidization device between searchers and advertisers.
Bibliography:istex:C461EBEC7B122A38FD75301E358675C562786E15
ArticleID:RAND12050
ark:/67375/WNG-891TL1XT-W
A previous version of this article circulated with the title “Mechanism Design in Two‐Sided Markets: Auctioning Users.” I am grateful to the editor, Mark Armstrong, and two anonymous referees for very helpful and detailed comments. I would like to thank my doctoral committee, Alessandro Pavan, Marco Ottaviani, Rakesh Vohra, and William Rogerson for their support and encouragement, as well as Jacques Crémer, Yassine Lefouili, Carlos Madeira, Shiran Rachmilevitch, James Schummer, Ron Siegel, Michael Whinston, and Asher Wolinsky for very helpful conversations. I benefited from discussions at seminars and conferences at Northwestern, Cornell, Bonn, Maastricht, MIT Sloan, Arizona State, Boston University, Toulouse, Bocconi, Collegio Carlo Alberto, Puc‐Rio, ZEW Conference on Platform Markets 2010, Econometric Society World Congress 2010, and INTERTIC 2010. The usual disclaimer applies.
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ISSN:0741-6261
1756-2171
DOI:10.1111/1756-2171.12050