A sponsored search auction (SSA), also known as a keyword auction, is an indispensable part of the business model of modern web hosts. It refers to results from a search engine that are not output by the main search algorithm, butrather clearly separate advertisements paid for by third parties. These advertisementsare typically related to the terms for which the user searched. They come in the formof a link and some information, with the hope that a search user will click on the linkand buy something from the advertiser.In sponsored search auctions, there are typically some fixed number of slots for advertisements and more advertisers that want these slots than there are slots. The advertisershave different valuations for these slots and slots are a scarce resource, so an auctionis done to determine how the slots will be assigned.
Prior to 1998, many advertisements were charged by impression, as it was theeasiest metric to calculate. In 1998, GoTo.com, Inc debuted a pay-per-click chargingsystem, with pricing and slot placement determined by an auction. GoTo used a firstprice auction, where bidders were placed according to their bids and charged their bidswhen they won. GoTo faced bidders who were constantly changing their bidin response to new information and changing information from other bidders.
Currently, charging per action is a common pricing scheme in affiliate networks,such as the Amazon Associates Program.
In 2002, Google Ads began using a second price auction to sell the single advertisementslot. Shortly thereafter, pages had multiple advertisements slots, which were allocatedand sold via generalized second-price auction (GSP) auction, the natural generalization of a second price, single item, multi bidderauction.[1]
Marketing activities related to the sponsored search are increasingly contracted out to specialized digital marketing agencies (DMAs). Thousands of DMAs operate in the US market, but most of them belong to one of the seven agency networks, which also bid on behalf of their clients for keywords for sponsored search.[2] This phenomenon has increased the fraction of auctions in which the same agency bids on behalf of different advertisers, thereby altering the normal functioning of standard sponsored search auction mechanisms, such as the generalized second-price auction and the Vickrey–Clarke–Groves auction.[3]
Generalized second-price auction (GSP) is the most commonly used auction mechanism for sponsored search.
An issue with GSP is that it's not a truthful auction and it is not the optimal strategy. To illustrate this, consider the following example.
There are three bidders with only two possible slots. The values ofeach bidders 1, 2, and 3 are $10, $5, and $3 respectively. Suppose that the first slot clickthrough rate (CTR) is 300 and the second slot CTR is 290. If bidder 1 is truthful, hewould have to pay
p1=\$5(300)=\$1500
u1=\$10(300)-\$1500=\$1500
u2=\$10(290)-\$3(290)=\$2030
u2>u1
Google uses a minor variant of GSP to auction off advertisement slots. Potentialadvertisements may be of varying quality. Suppose that there are two advertisementsfor eggs. One advertisement simply fills its space with the word “egg” repeated overand over, while the other advertisement shows a picture of eggs, contains brandinginformation, and mentions positive qualities about their eggs, such as cage-freeness.The second advertisement may be thought of as having higher quality than the firstadvertisement, being more useful to consumers, more likely to be clicked on, and morelikely to generate revenue for both the advertiser and Google. Advertisements thathave a history of high click through rates, are geographically targeted at the user, orhave a high quality landing page may also be thought of as having higher quality.[4]
Google assigns a numeric “quality” score
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pi:=bi+1
pi:=
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Vickrey–Clarke–Groves auction (VCG) is a truthful auction optimizing social welfare. VCG is more complicated to explain than GSP and that might deter many websites from using a VCG auction mechanism even though it's truthful. However, some websites use VCG as their auction mechanism, most notably Facebook.