Equilibrium Efficiency and Price Complexity in Sponsored Search Auctions

Modern sponsored search auctions are derived from the Generalized Second Price (GSP) auction. Although the GSP auction is not truthful, results by Edelman, Ostrovsky, and Schwarz [7] and Varian [13] give senses in which its outcome is equivalent to that of the truthful and welfaremaximizing VCG mechanism. The first main message of this paper is that these properties are not unique to the GSP auction: there is a large class of payment rules that, when coupled with the rank-by-bid allocation rule, induce sponsored search auctions with comparable guarantees. The second main message is that the GSP auction is “optimally simple”, subject to possessing a welfare-maximizing Nash equilibrium, when the complexity of a payment rule is measured using the dependencies between bids and slot prices. ∗Microsoft Research, Mountain View, CA 94043. Email [email protected]. †Department of Computer Science, Stanford University, 462 Gates Building, 353 Serra Mall, Stanford, CA 94305. Supported in part by NSF CAREER Award CCF-0448664, an ONR Young Investigator Award, an ONR PECASE Award, an AFOSR MURI grant, and an Alfred P. Sloan Fellowship. Email: [email protected].