Cold Start to Improve Market Thickness on Online Advertising Platforms: Data-Driven Algorithms and Field Experiments

Zikun Ye (), Dennis J. Zhang (), Heng Zhang (), Renyu Zhang (), Xin Chen () and Zhiwei Xu ()
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Zikun Ye: Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana-Champaign, Urbana, Illinois 61801
Dennis J. Zhang: Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130
Heng Zhang: W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Renyu Zhang: Department of Decision Sciences and Managerial Economics, CUHK Business School, The Chinese University of Hong Kong, Hong Kong, China
Xin Chen: H. Milton Stewart School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, Georgia 30313
Zhiwei Xu: Independent Contributor, Beijing, 100000, China

Management Science, 2023, vol. 69, issue 7, 3838-3860

Abstract: Cold start describes a commonly recognized challenge for online advertising platforms: with limited data, the machine learning system cannot accurately estimate the click-through rates (CTR) of new ads and, in turn, cannot efficiently price these new ads or match them with platform users. Traditional cold start algorithms often focus on improving the learning rates of CTR for new ads to improve short-term revenue, but unsuccessful cold start can prompt advertisers to leave the platform, decreasing the thickness of the ad marketplace. To address these issues, we build a data-driven optimization model that captures the essential trade-off between short-term revenue and long-term market thickness on the platform. Based on duality theory and bandit algorithms, we develop the shadow bidding with learning (SBL) algorithms with a provable regret upper bound of O ( T 2 / 3 K 1 / 3 ( log T ) 1 / 3 d 1 / 2 ) , where K is the number of ads and d captures the error magnitude of the underlying machine learning oracle for predicting CTR. Our proposed algorithms can be implemented in a real online advertising system with minimal adjustments. To demonstrate this practicality, we have collaborated with a large-scale video-sharing platform, conducting a novel, two-sided randomized field experiment to examine the effectiveness of our SBL algorithm. Our results show that the algorithm increased the cold start success rate by 61.62% while compromising short-term revenue by only 0.717%. Our algorithm has also boosted the platform’s overall market thickness by 3.13% and its long-term advertising revenue by (at least) 5.35%. Our study bridges the gap between the theory of bandit algorithms and the practice of cold start in online advertising, highlighting the value of well-designed cold start algorithms for online advertising platforms.

Keywords: cold start problem; online advertising; contextual bandit; two-sided field experiment (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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