Analyzing Frictions in Generalized Second-Price Auction Markets

Karthik Kannan (), Vandith Pamuru () and Yaroslav Rosokha
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Karthik Kannan: Eller College of Management, University of Arizona, Tucson, Arizona 85721
Vandith Pamuru: Indian School of Business, Hyderabad 500 111, India

Information Systems Research, 2023, vol. 34, issue 4, 1437-1454

Abstract: We investigate the role of frictions in determining the efficiency and bidding behavior in a generalized second-price auction—the most preferred mechanism for sponsored-search advertisements. In particular, we take a twofold approach of Q-learning–based computational simulations in conjunction with human-subject experiments. We find that the lower valued advertisers (who do not win the auction) exhibit highly exploratory behavior. Moreover, we find the presence of market frictions moderates this phenomenon and results in higher allocative efficiency. These results have implications for policymakers and auction-platform managers in designing incentives for more efficient auctions.

Keywords: auctions; generalized second-price auctions; human-subject experiments; Q-learning; machine learning; reinforcement learning (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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