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Optimal auction design in two-sided markets

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  • Renato Gomes

Abstract

type="main"> A key feature of online markets for advertising (e.g., sponsored links) is that clicking rates depend on the searchers' expectations that the platform selects relevant advertisers. This article studies auction design by a platform that maximizes profits in the long run, where clicking rates are mechanism dependent. In line with the practice of the major search engines, the revenue-maximizing mechanism is a scoring auction that combines the willingness to pay and the relevance to searchers of advertisers. By trading off rent extraction and clicking volume, this mechanism works as a cross-subsidization device between searchers and advertisers.

Suggested Citation

  • Renato Gomes, 2014. "Optimal auction design in two-sided markets," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 248-272, June.
    • Handle: RePEc:bla:randje:v:45:y:2014:i:2:p:248-272
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12050
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    References listed on IDEAS

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    Cited by:

    1. Ginger Zhe Jin & Marc Rysman, 2015. "Platform Pricing at Sports Card Conventions," Journal of Industrial Economics, Wiley Blackwell, vol. 63(4), pages 704-735, December.
    2. Chen, Yongmin & Zhang, Tianle, 2018. "Intermediaries and consumer search," International Journal of Industrial Organization, Elsevier, vol. 57(C), pages 255-277.
    3. Heiko Karle & Martin Peitz & Markus Reisinger, 2020. "Segmentation versus Agglomeration: Competition between Platforms with Competitive Sellers," Journal of Political Economy, University of Chicago Press, vol. 128(6), pages 2329-2374.
    4. Mark Armstrong, 2017. "Ordered Consumer Search," Journal of the European Economic Association, European Economic Association, vol. 15(5), pages 989-1024.
    5. He, Qiao-Chu, 2017. "Virtual items trade in online social games," International Journal of Production Economics, Elsevier, vol. 187(C), pages 1-14.
    6. Mueller-Frank, Manuel & M. Pai, Mallesh, 2015. "Do Online Social Networks Increase Welfare?," IESE Research Papers D/1118, IESE Business School.
    7. Sato, Susumu, 2019. "Freemium as optimal menu pricing," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 480-510.
    8. Alexandre de Cornière, 2016. "Search Advertising," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 156-188, August.
    9. Amirmahdi Tafreshian & Neda Masoud & Yafeng Yin, 2020. "Frontiers in Service Science: Ride Matching for Peer-to-Peer Ride Sharing: A Review and Future Directions," Service Science, INFORMS, vol. 12(2-3), pages 44-60, June.
    10. repec:spo:wpecon:info:hdl:2441/5kht5rc22p99sq5tol4efe4ssb is not listed on IDEAS
    11. Carroni, Elias & Ferrari, Luca & Righi, Simone, 2019. "The price of discovering your needs online," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 317-330.
    12. Loertscher, Simon & Niedermayer, Andras, 2020. "Entry-deterring agency," Games and Economic Behavior, Elsevier, vol. 119(C), pages 172-188.
    13. Gregor Langus & Vilen Lipatov, 2022. "Value Creation by Ad-Funded Platforms," CESifo Working Paper Series 9525, CESifo.
    14. Jan Frederic Nerbel & Markus Kreutzer, 2023. "Digital platform ecosystems in flux: From proprietary digital platforms to wide-spanning ecosystems," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-20, December.
    15. Patrick Hummel, 2018. "Hybrid mechanisms for Vickrey–Clarke–Groves and generalized second-price bids," International Journal of Game Theory, Springer;Game Theory Society, vol. 47(1), pages 331-350, March.
    16. Yongmin Chen, 2024. "Search and Competition Under Product Quality Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 633-661, June.
    17. Loertscher, Simon & Mezzetti, Claudio, 2021. "A dominant strategy, double clock auction with estimation-based tatonnement," Theoretical Economics, Econometric Society, vol. 16(3), July.
    18. Marleen Marra, 2024. "Estimating and Auction Platform Game with Two-Sided Entry," Working Papers hal-03393068, HAL.
    19. repec:spo:wpmain:info:hdl:2441/5kht5rc22p99sq5tol4efe4ssb is not listed on IDEAS
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    22. Loertscher, Simon & Marx, Leslie M., 2017. "Club good intermediaries," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 430-459.

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