Mechanism Design for Internet Advertising (slides)

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slides for a presentation on 2 papers: Varian, H. Economic Mechanism Design for Computerized Agents Edelman, B. et al. Internet Advertising and the Generalized Second Price Auction: Selling Bil- lions of Dollars Worth of Keywords

Text of Mechanism Design for Internet Advertising (slides)

Mechanism Design for Internet AdvertistingPhilip Zigoris UC Santa Cruz

Mechanism Design for Internet Advertisting p.1/22

IntroductionWhat is mechanism design?

Why is this setting different than what weve been talking about?

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OverviewPart I: What are some different types of auctions? Does it pay to misrepresent yourself? What happens if the bidding is done by a computerized

agent?(Varian, H. Economic Mechanism Design for Computerized Agents.)

Part II: How does internet advertising work? More appropriately,

what is our model of internet advertising? Is it fair? Whose interest does it favor? How does it compare to standard auction methods?(Edelman, B. et al. Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords.)

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Part I

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Different Types of AuctionsEnglish Auction Open bidding with increasing price.

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Different Types of AuctionsEnglish Auction Open bidding with increasing price. Dutch Auction Price is lowered until someone accepts.

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Different Types of AuctionsEnglish Auction Open bidding with increasing price. Dutch Auction Price is lowered until someone accepts. Sealed First Price Auction Every submits their bid in secret. Highest bidder pays the amount they bid.

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Different Types of AuctionsEnglish Auction Open bidding with increasing price. Dutch Auction Price is lowered until someone accepts. Sealed First Price Auction Every submits their bid in secret. Highest bidder pays the amount they bid. Sealed Second Price Auction Also called the Vickrey Auction (VA). Highest bidders pays the second highest bid.

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Does it pay to lie?English Auction

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Does it pay to lie?English Auction No Dutch Auction

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Does it pay to lie?English Auction No Dutch Auction Yes Sealed First Price Auction

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Does it pay to lie?English Auction No Dutch Auction Yes Sealed First Price Auction Yes Sealed Second Price Auction

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Does it pay to lie?English Auction No Dutch Auction Yes Sealed First Price Auction Yes Sealed Second Price Auction No

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Does it pay to lie?English Auction No Dutch Auction Yes Sealed First Price Auction Yes Sealed Second Price Auction No What is the major difference between VA and English Auction?

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Does it pay to lie?English Auction No Dutch Auction Yes Sealed First Price Auction Yes Sealed Second Price Auction No What is the major difference between VA and English Auction? Privacy of valuation

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Why is Truth-Telling the Dominant Strategy for VA? Proof: Simple case, there are two bidders with true value vi and bid bi , i = {1, 2}. Bidder 1s expected payoff is P r(b1 > b2 )[v1 b2 ] That is, the probability of winning times the payoff (the items value minus how much they pay for it). If second term is positive you want to maximize probability of winning, otherwise you want to minimize it.

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Auctions with Computerized Agents

Privacy is important for buyer and seller.

Mechanism design is supposed to alleviate these concerns.

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Generalized Vickrey AuctionA more general model is proposed where each user has a utility function for some set of goods. The Generalized Vickrey Auction or Vickrey-ClarkGroves Auction is a truth-telling mechanism where it is in everyones best interest to reveal their true utility function.

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Part II

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Money, money, money...Google over 98% of revenue from advertising Yahoo! over 50%....

Together these companies are worth $125 billion, roughly 6 times that of all US airlines.

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Money, money, money...Google over 98% of revenue from advertising Yahoo! over 50%....

Together these companies are worth $125 billion, roughly 6 times that of all US airlines.

YOWZAH!

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A Brief History of Internet Advertising

1. 2. 3.

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A Brief History of Internet Advertising

1. Early (1994) advertising was sold on a per-impression basis. 2. 3.

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A Brief History of Internet Advertising

1. Early (1994) advertising was sold on a per-impression basis. 2. Targeted advertising introduced by Overture (1997). Generalized rst-price auction: advertisers bid to have their ad show up in relation to chosen keywords. You pay what you bid. Problem: Its not stable in the one-shot case. 3.

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A Brief History of Internet Advertising

1. Early (1994) advertising was sold on a per-impression basis. 2. Targeted advertising introduced by Overture (1997). Generalized rst-price auction: advertisers bid to have their ad show up in relation to chosen keywords. You pay what you bid. Problem: Its not stable in the one-shot case. 3. In 2002 Google introduced AdWords Select: a generalized second price auction: unique auction model uses Nobel Prize-winning economic theory to eliminate . . . that feeling that youve paid too much

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Generalized Second Price Auction (GSP)

Everytime a keyword is queried, there are N available advertising slots. Let bi and vi be the bid and true per-click value for advertiser i = 1 . . . K. Let g(j) and b(j) be the id and bid of the j th highest bidder. Slot j is assigned to user g(j) and they are charged bj+1 for every click

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Generalized Second Price Auction (GSP)

Everytime a keyword is queried, there are N available advertising slots. Let bi and vi be the bid and true per-click value for advertiser i = 1 . . . K. Let g(j) and b(j) be the id and bid of the j th highest bidder. Slot j is assigned to user g(j) and they are charged bj+1 for every click What is a unit of internet advertising?

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User payoff in GSPLet j be the expected number of clicks on the ad in slot j. User g(j)s total valuation for slot j is j v (j) . They pay p(j) = j b(j+1) so their total payoff is: j (v (j) b(j+1) ) What assumptions are being made?

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GSP vs. VCGGSP does not map exactly to Vickrey-Clark-Groves(VCG) Mechanism. In VCG, the payment for slot j is dened inductively: pV,(j) = (j j+1 )b(j+1) + pV,(j+1)

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GSP vs. VCGGSP does not map exactly to Vickrey-Clark-Groves(VCG) Mechanism. In VCG, the payment for slot j is dened inductively: pV,(j) = (j j+1 )b(j+1) + pV,(j+1)

In VCG, truth-telling is the dominant strategy.

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GSP vs. VCGGSP does not map exactly to Vickrey-Clark-Groves(VCG) Mechanism. In VCG, the payment for slot j is dened inductively: pV,(j) = (j j+1 )b(j+1) + pV,(j+1)

In VCG, truth-telling is the dominant strategy. In GSP, truth-telling is not the dominant strategy: Values are $10, $4,$2. 1 = 200, 2 = 199, 3 = 0 Bidder 1s payoff for bidding $10 = $1200. Payoff for shading bid at $3=$1592.

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GSP vs. VCGGSP does not map exactly to Vickrey-Clark-Groves(VCG) Mechanism. In VCG, the payment for slot j is dened inductively: pV,(j) = (j j+1 )b(j+1) + pV,(j+1)

In VCG, truth-telling is the dominant strategy. In GSP, truth-telling is not the dominant strategy: Values are $10, $4,$2. 1 = 200, 2 = 199, 3 = 0 Bidder 1s payoff for bidding $10 = $1200. Payoff for shading bid at $3=$1592.

Question: why doesnt Google use VCG?

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Static GSP & Envy-Free Equilibria

Consider scenario where bids can constantly change. Eventually we learn information about other peoples valuation. We ask: what kind of equilibrium is attained? Denition An equilibrium of the static game imposed by GSP is locally envy-free if a player cannot improve his payoff by exchanging bids with the player ranked one position above him, i.e. i min{N, K} we have i sg(i) p(i) i1 sg(i) p(i1) .

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Envy-Free Equilibria and Stable Matchings

Map this concept to that of stable matchings. Lemma 0.0 A locally envy-free equilibrium of auction is a stable assignment. Lemma 0.0 Reverse implication is also true, provided the number of bidders is greater than the number of available slots.

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One Equilibrium in Particular

Let = where pV is the payment in the dominant-strategy equilibrium of VCG and j is the positio