An experimental study of sponsored-search auctions

We study the Generalized Second Price auctions—a standard method for allocating online search advertising—experimentally, considering both the static environment assumed by the prevailing theory and a dynamic game capturing the salient aspects of real-world search advertising auctions. Subjects of our experiment bid consistently with the leading equilibrium notions, but exhibit significant overbidding relative to the Vickrey-Clarke-Groves (VCG) outcome favored as an equilibrium selection in the literature. The observed bidding behavior is well explained by a model that explicitly accounts for the strategic uncertainty facing a bidder, which suggests strategic uncertainty as a source of the observed departure from the VCG outcome. Meanwhile, the ⇤We are grateful to Jacob and Michelle Goeree, John Kagel, Dan Levin, Michael Ostrovsky, Michael Schwarz, Yan Chen, and the participants at the AMMA 2011, Monash University, Ohio State University, University of East Anglia, University of Michigan, Universitat Pompeu Fabra, University of Zurich, and the WCU Market Design Conference held at Yonsei University in August 2010, for valuable comments, and to Brian Wallace for writing the experimental program, and to Tom Rutter for helping us run the experiment. Che and Kim acknowledge the support by WCU program through the National Research Foundation of Korea funded by the Ministry of Education, Science and Technology (R32-2008-000-10056-0). Choi acknowledges the Economic and Social Research Council (UK) Grant No. RES-061-25-0348 and via the ELSE for financial support. †Department of Economics, Columbia University, 420 West 118th St, 10161AB, New York, NY 10027, USA (Email: [email protected], URL: http://www.columbia.edu/ ̃yc2271). ‡Department of Economics, University College London, Gower Street, London WC1E 6BT, UK (Email: [email protected], URL: http://www.homepages.ucl.ac.uk/ ̃uctpsc0). §Department of Economics, Seoul National University,1 Gwanak-ro Gwanak-gu, Seoul 151-742, South Korea (Email: [email protected], URL: https://sites.google.com/site/jikim72/home).