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Keyword Auctions as Weighted Unit-Price Auctions

In recent years, unit-price auctions in which bidders bid their willingness-to-pay for per-unit realized outcome have been adopted by major keyword advertising providers such as Yahoo!, Google, and MSN, in selling keyword advertising slots on web sites. The majority of keyword auctions are pay-per-click auctions in which advertisers specify their willingness-to-pay per click, and pay by the clicks they actually receive. In pay-per-click auctions, keyword advertising providers often learn about advertisers’ abilities to generate clicks, e.g., by observing the click-through rates of the advertisement in the past. Such information has been gradually integrated into the keyword auction designs. For example, in 2003, Google started ranking advertisers by the product of their bid prices and their historical click-through rates. In 2005, Google adopted a more sophisticated ranking scheme that weighs advertisers’ unit-price bids by “quality scores”, which are determined by several factors including advertisers’ historical click-through rates, the relevance of the advertisement text, and quality of landing pages. Are there economic justifications for auctioneers to weigh bidders’ unit-price bids differently? What is the impact of such weighting schemes on bidding behavior, efficiency, and revenue? The availability of click-through information also enables alternative minimum bid policies. For example, Google has recently abandoned their one-size-fits-all minimum-bid policy in favor of a new policy that imposes higher minimum bids for advertisements with low quality scores. These practices raise new questions: What is the impact of different minimum bid policies on bidding behavior, efficiency, and revenue? The above questions regarding ranking scheme and minimum bid policies are worthy, given the sheer size of the keyword advertising industry. Since 2002, the total revenue of Google has increased almost 15 fold, to $6.1 billion in 2005, most of which comes from keyword advertising. In order to address the above questions, we study a class of auction mechanisms, weighted unit-price auctions (WUPAs), which capture the key features of keyword advertising auctions. A distinguishing feature of our setting is that the auctioneer can observe a signal about each bidder’s future yield (which we term as the bidder’s type) before the auction. The novelty of the WUPAs lies in that it provides an intuitive way for the auctioneer to take advantage of such interim information, i.e., by assigning different weighting factors and/or imposing different minimum bids for bidders of different types. Our main goals are (1) to study the impact of two design parameters of WUPAs, namely, the weighting scheme and the minimum bid policy, on the equilibrium bidding, allocation efficiency, and revenue, and (2) to compare the efficiency and revenue of WUPAs with those of standard auctions. Our results have implications more beyond pay-per-click keyword auctions. First, our study can readily apply to other pricing models in keyword auctions. For example, some keyword advertising providers offer pay-per-call and pay-per-action formats, in which advertisers pay only if a customer