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Simplified Mechanisms with Applications to Sponsored Search and Package Auctions

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  • Paul Milgrom

    (Program on Market Design, Stanford University)

Abstract

A simplified mechanism is a direct mechanism modified by restricting the set of reports or bids. An example is the auction used to place ads on Internet search pages, in which each advertiser bids a single price to determine the allocation of eight or more ad positions on a page. If a simplified mechanism satisfies the “best-reply-closure” property, then all Nash equilibria of the simplified mechanism are also equilibria of the original direct mechanism. For search advertising auctions, suitable simplifications eliminate inefficient, low-revenue equilibria that are favored in the original direct mechanism when bidding costs are positive.

Suggested Citation

  • Paul Milgrom, 2007. "Simplified Mechanisms with Applications to Sponsored Search and Package Auctions," Discussion Papers 07-008, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:07-008
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    References listed on IDEAS

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    1. Simon, Leo K & Zame, William R, 1990. "Discontinuous Games and Endogenous Sharing Rules," Econometrica, Econometric Society, vol. 58(4), pages 861-872, July.
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    6. Lawrence M. Ausubel & Peter Crampton & Paul Milgrom, 2004. "The Clock-Proxy Auction: A Practical Combinatorial Auction Design," Discussion Papers 03-034, Stanford Institute for Economic Policy Research.
    7. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721, October.
    8. Peter Cramton & Yoav Shoham & Richard Steinberg, 2004. "Combinatorial Auctions," Papers of Peter Cramton 04mit, University of Maryland, Department of Economics - Peter Cramton, revised 2004.
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    Cited by:

    1. Goeree, Jacob K. & Holt, Charles A., 2010. "Hierarchical package bidding: A paper & pencil combinatorial auction," Games and Economic Behavior, Elsevier, vol. 70(1), pages 146-169, September.
    2. Pallavi Pal, 2023. "Sponsored Search Auction and the Revenue- Maximizing Number of Ads per Page," CESifo Working Paper Series 10299, CESifo.

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    More about this item

    Keywords

    simplified mechanisms; sponsored search; generalized second price auctions; package auctions; combinatorial auctions; core-selecting auctions; mechanism design;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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