Tutorial Proposal: Mechanism Design for Online Advertisement

Online advertising is a booming industry and is developing into a major advertising outlet for millions of firms. In 2004, in United States alone, firms spent $9.6 billion on online advertising, a nearly 33% increase over the spending in 2003 [11]. Analysts project that by 2009, the online advertising budget will reach $22.3 billion [5]. Various factors contribute to the unprecedented growth of this industry. The rapid growth of the Internet, online businesses, and availability of broadband are all clearly important factors as is the ability to run highly targeted advertising campaigns. Unlike traditional print media where advertisements are sold primarily on a perimpression basis (where advertisers are charged when their ad is shown), the online world easily accommodates business models based on a pay-for-performance (P4P) basis (e.g., per-click where advertisers are charged only when their ad is clicked-on, or per-acquisition where they are charged when a click on the ad results in a sale). In 2004, around 40% of online ads were sold on a P4P basis [11]. Such business models incentivize the publishers to make efforts to improve the effectiveness of the advertisements [7]. The P4P business model was pioneered by Overture (now Yahoo! Search Marketing) and later adopted by their competitors, mainly Google’s Adwords and very recently MSN’s AdCenter. Given the real-time and fast-paced nature of the business, pricing online advertisements is a difficult task. The major publishers in this market, namely Google, Yahoo!, and MSN, sell advertisements almost exclusively on a per-click basis through auctions. In these systems, advertisers submit a bid for a string of text, or keyword, indicating how much the advertiser is willing to pay for a click on a page associated with that keyword. When a page is accessed by a user, the publisher determines a set of relevant keywords. Advertisers who have expressed interest in the relevant keywords are allocated ad slots according to an allocation scheme and then charged upon a click according to a pricing scheme. The specifics of these schemes vary from publisher to publisher, and range from variants of the first and second price auctions, with or without considering the click-through rate (CTR) of an ad. In this tutorial, we will describe the mechanisms currently used for ad auctions, and present some central issues encountered in the design of ad auctions.