Keyword auctions with budget-constrained bidders

Youngwoo Koh ()

Review of Economic Design, 2013, vol. 17, issue 4, 307-321

Abstract: We study a keyword auction model where bidders have constrained budgets. In the absence of budget constraints, Edelman et al. (Am Econ Rev 97(1):242–259, 2007 ) and Varian (Int J Ind Organ 25(6):1163–1178, 2007 ) analyze “locally envy-free equilibrium” or “symmetric Nash equilibrium” bidding strategies in generalized second-price auctions. However, bidders often have to set their daily budgets when they participate in an auction; once a bidder’s payment reaches his budget, he drops out of the auction. This raises an important strategic issue that has been overlooked in the previous literature: Bidders may change their bids to inflict higher prices on their competitors because under generalized second-price, the per-click price paid by a bidder is the next highest bid. We provide budget thresholds under which equilibria analyzed in Edelman et al. (Am Econ Rev 97(1):242–259, 2007 ) and Varian (Int J Ind Organ 25(6):1163–1178, 2007 ) are sustained as “equilibria with budget constraints” in our setting. We then consider a simple environment with one position and two bidders and show that a search engine’s revenue with budget constraints may be larger than its revenue without budget constraints. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Keyword auctions; Budget constraints; Symmetric Nash equilibrium; Nash equilibrium; D44; L81; M37 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10058-013-0147-9

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