GSP: The Cinderella of Mechanism Design

Nearly fifteen years ago, Google unveiled the generalized second price (GSP) auction. By all theoretical accounts including their own [29], this was the wrong auction — the Vickrey-Clarke-Groves (VCG) auction would have been the proper choice — yet GSP has succeeded spectacularly. We give a deep justification for GSP’s success: advertisers’ preferences map to a model we call value maximization; they do not maximize profit as the standard theory would believe. For value maximizers, GSP is the truthful auction [4]. Moreover, this implies an axiomatization of GSP — it is an auction whose prices are truthful for value maximizers — that can be applied much more broadly than the simple model for which GSP was originally designed. In particular, applying it to arbitrary single-parameter domains recovers the folklore definition of GSP. Through the lens of value maximization, GSP metamorphosizes into a powerful auction, sound in its principles and elegant in its simplicity.