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Multistage Intermediation in Display Advertising

Problem definition : We consider a setting where online advertisers seek to acquire impressions from an advertising exchange through a multitier network of intermediaries, and study the mechanisms offered by the ad exchange and intermediaries when the advertisers’ values are private. Academic/practical relevance : As opposed to traditional manufacturer/retailer settings, intermediaries in display advertising auction off contingent goods that they purchase only if downstream buyers signal interest. This motivates our study of how intermediaries should bid on behalf of their customers in the mechanism of an upstream intermediary and how the structure of the intermediation network affects the profits of its participants. Methodology : We provide a game-theoretic model to study the mechanisms offered by the ad exchange and intermediaries within a practically relevant class of mechanisms. Results : We characterize a subgame perfect equilibrium of the game among the intermediaries and the seller, and show that the equilibrium mechanisms have a simple and appealing structure: intermediaries bid the virtual value associated with the maximum downstream report in the upstream intermediary’s mechanism, whenever this quantity is positive. Managerial implications : We show that economic incentives are not necessarily aligned along the network and that the position in the intermediation network has a significant impact on the profits of the intermediaries. That is, when advertisers’ value distribution has a “light tail,” upstream intermediaries profit more (relative to downstream ones). Moreover, as the tail of the advertisers’ value distribution gets heavier, downstream intermediaries profit more, and their profits eventually exceed those of upstream ones. In addition, we show that a horizontal merger may not be profitable for intermediaries, and we analyze the impact of market size on the profits of intermediaries.