Optimal Bidding Strategy for Keyword Auctions and Other Continuous-time Markets

This paper models continuous-time mass bidding markets, such as keyword auctions and market-based resource allocation systems, as a stochastic dynamic system that fluctuates around an average value under the influence of its users. The user’s objective to maximize his long-term average utility is formulated as a stochastic control problem. The optimal bidding strategy is calculated both analytically and numerically. It is shown that market fluctuations tend to decrease expected system revenue, thus search engines like Google and Yahoo have an incentive to create a secondary stable market such as a futures market or a reservation market.