An experimental study of sponsored-search auctions

We study the Generalized Second Price auctions—a standard method for allocating online search advertising—experimentally, considering both the static environment assumed by the prevailing theory and a dynamic game capturing the salient aspects of real-world search advertising auctions. Subjects of our experiment bid consistently with the leading equilibrium notions, but exhibit significant overbidding relative to the Vickrey–Clarke–Groves (VCG) outcome favored as an equilibrium selection in the literature. The observed bidding behavior is well explained by a model that explicitly accounts for the strategic uncertainty facing a bidder, which suggests strategic uncertainty as a source of the observed departure from the VCG outcome. Meanwhile, the observed bidding behavior in static environment approximates those of dynamic environments for important cases. Our finding thus provides some empirical support for the use of a static game as a valid modeling proxy, but calls into question the prevailing equilibrium selection.