Truthful Auction Pricing of Keywords

Posted: November 2, 2005

Stanford documentation on the “Truthful Auction Pricing of Keywords”

We present a truthful auction for pricing advertising slots on a web-page assuming that advertisements for different merchants must be ranked in decreasing order of their (weighted) bids. This captures both the “Overture model” where bidders are ranked in order of the submitted bids, and the “Google model” where bidders are ranked in order of the expected revenue (or utility) that their advertisement generates. Assuming separable click-through rates, we prove revenue-equivalence between our auction and the non-truthful next-price auctions currently in use.

For those who like some serious math, the document obliges. Overall, it’s written quite well – but there are parts most of us will nod our heads and skip.

The document goes into both the pricing model for Yahoo Search Marketing (referred to as Overture in the document) and Google AdWords.

Once I work out some of the math, I’ll have to comment further (or let those who get some advanced equations better than I do comment).

Full PDF document here.