Competing Ad Auctions

Itai Ashlagi (), Benjamin G. Edelman () and Hoan Soo Lee ()
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Itai Ashlagi: Harvard Business School, Negotiation, Organizations & Markets Unit
Benjamin G. Edelman: Harvard Business School, Negotiation, Organizations & Markets Unit
Hoan Soo Lee: Harvard Business School, Negotiation, Organizations & Markets Unit

No 10-055, Harvard Business School Working Papers from Harvard Business School

Abstract: We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: We derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.

Pages: 26 pages
Date: 2010-01, Revised 2013-09
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