Efficient advert assignment

Frank Kelly, Peter Key, Neil Walton
Operations Research 64 (2016) 822-837.


We develop a framework for the analysis of large-scale ad auctions where adverts are assigned over a continuum of search types. For this pay-per-click market, we provide an efficient mechanism that maximizes social welfare. In particular, we show that the social welfare optimization can be solved in separate optimizations conducted on the time scales relevant to the search platform and advertisers. Here, on each search occurrence, the platform solves an assignment problem and, on a slower time scale, each advertiser submits a bid that matches its demand for click-throughs with supply. Importantly, knowledge of global parameters, such as the distribution of search terms, is not required when separating the problem in this way. Exploiting the information asymmetry between the platform and advertiser, we describe a simple mechanism that incentivizes truthful bidding, has a unique Nash equilibrium that is socially optimal, and thus implements our decomposition. Further, we consider models where advertisers adapt their bids smoothly over time and prove convergence to the solution that maximizes social welfare. Finally, we describe several extensions that illustrate the flexibility and tractability of our framework.

Keywords: sponsored search; VCG mechanism; decomposition; auction; social welfare optimization

arxiv paper, paper, Cambridge repository
See also Position Auctions in Practice, M Goldman, J Rao.
An earlier version was presented at the 15th ACM Conference on Economics and Computation, 2014 - abstract: Incentivized optimal advert assignment via utility decomposition