Bidding with Budgets: Algorithmic and Data-Driven Bids in Digital Advertising

Dirk Bergemann, Alessandro Bonatti and Nicholas Wu
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Alessandro Bonatti: Massachusetts Institute of Technology
Nicholas Wu: Yale University

No 2429, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: In digital advertising, the allocation of sponsored search, sponsored product, or display advertisements is mediated by auctions. The generation of bids in these auctions for attention is increasingly supported by auto-bidding algorithms and platform-provided data. We analyze the equilibrium properties of a sequence of increasingly sophisticated auto-bidding algorithms. First, we consider the equilibrium bidding behavior of an individual advertiser who controls the auto bidding algorithm through the choice of their budget. Second, we examine the interaction when all bidders use budget-controlled bidding algorithms. Finally, we derive the bidding algorithm that maximizes the platformÕs revenue while ensuring all advertisers continue to participate.

Pages: 29 pages
Date: 2025-03-02
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