Optimal Reserve Price for the Generalized Second-price Auction in Sponsored Search Advertising

In sponsored search advertising advertisers bid ad links pertaining to a keyword from search engines. This paper presents a pricing model for sponsored search advertising in a dynamic framework. It focuses on the generalized second-price auction, which is widely used by major search engines including Google and Yahoo!. Unlike the assertion in the literature that the number of advertisers and the number of ad links have no impact on the selection of reserve price, our result is noticeably different. We show that the optimal reserve price is affected by both factors. In particular, under a set of mild conditions, the optimal reserve price is equal to the expected value of some order statistic of advertiser’s per-click values. Simulations based on the continuous-time bidding process confirm our theoretical findings.