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Keyword auctions with budget-constrained bidders

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  • Youngwoo Koh

Abstract

We study a keyword auction model where bidders have constrained budgets. In the absence of budget constraints, Edelman et al. (Am Econ Rev 97(1):242–259, 2007 ) and Varian (Int J Ind Organ 25(6):1163–1178, 2007 ) analyze “locally envy-free equilibrium” or “symmetric Nash equilibrium” bidding strategies in generalized second-price auctions. However, bidders often have to set their daily budgets when they participate in an auction; once a bidder’s payment reaches his budget, he drops out of the auction. This raises an important strategic issue that has been overlooked in the previous literature: Bidders may change their bids to inflict higher prices on their competitors because under generalized second-price, the per-click price paid by a bidder is the next highest bid. We provide budget thresholds under which equilibria analyzed in Edelman et al. (Am Econ Rev 97(1):242–259, 2007 ) and Varian (Int J Ind Organ 25(6):1163–1178, 2007 ) are sustained as “equilibria with budget constraints” in our setting. We then consider a simple environment with one position and two bidders and show that a search engine’s revenue with budget constraints may be larger than its revenue without budget constraints. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Youngwoo Koh, 2013. "Keyword auctions with budget-constrained bidders," Review of Economic Design, Springer;Society for Economic Design, vol. 17(4), pages 307-321, December.
  • Handle: RePEc:spr:reecde:v:17:y:2013:i:4:p:307-321
    DOI: 10.1007/s10058-013-0147-9
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    References listed on IDEAS

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    1. M. Yenmez, 2014. "Pricing in position auctions and online advertising," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 243-256, January.
    2. Marco Pagnozzi, 2006. "Overbidding to Harm Competitors: Sequential Auctions with Budget Constraints," Rivista di Politica Economica, SIPI Spa, vol. 96(5), pages 135-162, September.
    3. Jean-Pierre Benoît & Vijay Krishna, 2001. "Multiple-Object Auctions with Budget Constrained Bidders," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 155-179.
    4. Carolyn Pitchik & Andrew Schotter, 1988. "Perfect Equilibria in Budget-Constrained Sequential Auctions: An Experimental Study," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 363-388, Autumn.
    5. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
    6. Kenneth C. Wilbur & Yi Zhu, 2009. "Click Fraud," Marketing Science, INFORMS, vol. 28(2), pages 293-308, 03-04.
    7. Varian, Hal R., 2007. "Position auctions," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1163-1178, December.
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    Cited by:

    1. Henk Kox & Bas Straathof & Gijsbert Zwart, 2017. "Targeted advertising, platform competition, and privacy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 557-570, September.
    2. Lawrence M. Ausubel & Justin E. Burkett & Emel Filiz-Ozbay, 2017. "An experiment on auctions with endogenous budget constraints," Experimental Economics, Springer;Economic Science Association, vol. 20(4), pages 973-1006, December.
    3. Henk Kox & Bas Straathof & Gijsbert Zwart, 2017. "Targeted advertising, platform competition, and privacy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 557-570, September.
    4. Mohammad Zia & Ram C. Rao, 2019. "Search Advertising: Budget Allocation Across Search Engines," Marketing Science, INFORMS, vol. 38(6), pages 1023-1037, November.

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    More about this item

    Keywords

    Keyword auctions; Budget constraints; Symmetric Nash equilibrium; Nash equilibrium; D44; L81; M37;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising

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