Simplified Mechanisms with an Application to Sponsored-Search Auctions

Paul Milgrom

No 08-013, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: A mechanism can be simplified by restricting its message space. If the restricted message space satisfies a certain “outcome closure property,” then the simplification is “tight”: for every S=0 any Nash equilibrium of the simplified mechanism is also an Nash equilibrium of the unrestricted mechanism. Prominent auction and matching mechanisms are tight simplifications of mechanisms studied in economic theory and often incorporate price-adjustment features that facilitate simplification. The generalized second price auction used for sponsored-search advertising is a tight simplification of a series of second-price auctions that eliminates the lowest revenue equilibrium outcomes and leaves intact only higher revenue equilibria.

Keywords: sponsored search; generalized second-price auctions; mechanism design (search for similar items in EconPapers)
JEL-codes: C78 D44 (search for similar items in EconPapers)
Date: 2008-12
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Citations: View citations in EconPapers (3)

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Journal Article: Simplified mechanisms with an application to sponsored-search auctions (2010)
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