Contextual Standard Auctions with Budgets: Revenue Equivalence and Efficiency Guarantees

Santiago Balseiro (), Christian Kroer () and Rachitesh Kumar ()
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Santiago Balseiro: Columbia University, New York, New York 10027
Christian Kroer: Columbia University, New York, New York 10027
Rachitesh Kumar: Columbia University, New York, New York 10027

Management Science, 2023, vol. 69, issue 11, 6837-6854

Abstract: The internet advertising market is a multibillion dollar industry in which advertisers buy thousands of ad placements every day by repeatedly participating in auctions. An important and ubiquitous feature of these auctions is the presence of campaign budgets, which specify the maximum amount the advertisers are willing to pay over a specified time period. In this paper, we present a new model to study the equilibrium bidding strategies in standard auctions, a large class of auctions that includes first and second price auctions, for advertisers who satisfy budget constraints on average. Our model dispenses with the common yet unrealistic assumption that advertisers’ values are independent and instead assumes a contextual model in which advertisers determine their values using a common feature vector. We show the existence of a natural value pacing–based Bayes–Nash equilibrium under very mild assumptions. Furthermore, we prove a revenue equivalence showing that all standard auctions yield the same revenue even in the presence of budget constraints. Leveraging this equivalence, we prove price of anarchy bounds for liquid welfare and structural properties of pacing-based equilibria that hold for all standard auctions. In recent years, the internet advertising market has adopted first price auctions as the preferred paradigm for selling advertising slots. Our work, thus, takes an important step toward understanding the implications of the shift to first price auctions in internet advertising markets by studying how the choice of the selling mechanism impacts revenues, welfare, and advertisers’ bidding strategies.

Keywords: first price auctions; contextual value models; budget constraints; equilibria in auctions; revenue equivalence; internet advertising (search for similar items in EconPapers)
Date: 2023
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