Best of Both Worlds Ad Contracts: Guaranteed Allocation and Price with Programmatic Efficiency

Maxime C. Cohen (), Antoine Désir (), Nitish Korula () and Balasubramanian Sivan ()
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Maxime C. Cohen: Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada
Antoine Désir: Technology and Operations Management, INSEAD, 77305, Fontainebleau, France
Nitish Korula: Google, New York 10011
Balasubramanian Sivan: Google Research, New York 10011

Management Science, 2023, vol. 69, issue 7, 4027-4050

Abstract: Buying display ad impressions via real-time auctions comes with significant allocation and price uncertainties. We design and analyze a contract that mitigates this uncertainty risk by providing guaranteed allocation and prices while maintaining the efficiency of buying in an auction. We study how risk aversion affects the desire for guarantees and how to price a guaranteed allocation. We propose to augment the traditional auction with a programmatic purchase option (which we call a Market-Maker contract ) that removes allocation and price uncertainties. Instead of participating in the auction, advertisers can secure impressions in advance at a fixed premium price offered by the Market-Maker. It is then the responsibility of the Market-Maker to procure these impressions by bidding in the auction. We model buyers as risk-averse agents and analyze the equilibrium outcome when buyers face two purchase options (auction and Market-Maker contract). We derive analytical expressions for the Market-Maker price that reveal insightful relationships with uncertainties in the auction price and buyers’ risk levels. We also show the existence of a Market-Maker price that simultaneously improves the seller’s revenue and the sum of buyers’ utilities. As a building block to our analysis, we establish the truthfulness of the multiunit auction when buyers have nonquasilinear utilities because of risk aversion. Recently, the Google’s Display & Video 360 platform started offering a product akin to Market-Maker called “Guaranteed Packages,” which was inspired by this paper.

Keywords: online ads; guaranteed contracts; risk aversion; auctions; revenue management (search for similar items in EconPapers)
Date: 2023
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