Exclusive Display in Sponsored Search Advertising

As sponsored search becomes increasingly important as an advertising medium for firms, search engines are exploring more advanced bidding and ranking mechanisms to increase their revenue from sponsored search auctions. For instance, Google, Yahoo! and Bing are investigating auction mechanisms in which each advertiser submits two bids: one bid for the standard display format in which multiple advertisers are displayed, and one bid for being shown exclusively. If the exclusiveplacement bid by an advertiser is high enough then only that advertiser is displayed, otherwise multiple advertisers are displayed and ranked based on their multiple-placement bids. We call such auctions two-dimensional auctions and study two extensions of the Generalized Second Price (GSP ) mechanism that are currently being evaluated by search engines. We show that allowing advertisers to bid for exclusivity always generates higher revenues for the search engine. Interestingly, even if the final outcome is multiple display, the search engine still extracts higher revenue because of increased competition among advertisers, simply because bidding for exclusivity is allowed. In fact, one of the auctions we consider can extract the full surplus of the bidders as search engine revenue under certain conditions. Under other conditions on the advertisers’ valuations for exclusivity as well as the heterogeneity in their valuations for exclusivity, exclusive display auctions can benefit the advertisers also.