### Abstract

Despite the tremendous commercial success of generalized second-price (GSP) keyword auctions, it still remains a big challenge for an advertiser to formulate an effective bidding strategy. In this paper, we strive to bridge this gap by proposing a framework for studying pure-strategy Nash equilibria in GSP auctions. We first analyze the equilibrium bidding behaviors by investigating the properties and distribution of all pure-strategy Nash equilibria. Our analysis shows that the set of all pure-strategy Nash equilibria of a GSP auction can be partitioned into separate convex polyhedra based on the order of bids if the valuations of all advertisers are distinct. We further show that only the polyhedron that allocates slots efficiently is weakly stable, thus allowing all inefficient equilibria to be weeded out. We then propose a novel refinement method for identifying a set of equilibria named the stable Nash equilibrium set (STNE) and prove that STNE is either the same as or a proper subset of the set of the well-known symmetrical Nash equilibria. These findings free both auctioneers and advertisers from complicated strategic thinking. The revenue of a GSP auction on STNE is at least the same as that of the classical Vickrey-Clarke-Groves mechanism and can be used as a benchmark for evaluating other mechanisms. At the same time, STNE provides advertisers a simple yet effective and stable bidding strategy.

Original language | English (US) |
---|---|

Pages (from-to) | 57-87 |

Number of pages | 31 |

Journal | Journal of the Association of Information Systems |

Volume | 13 |

Issue number | 2 |

State | Published - Feb 2012 |

### Keywords

- Generalized second-price
- Keyword advertising
- Nash equilibrium
- Sponsored search
- Stability

### ASJC Scopus subject areas

- Computer Science Applications
- Information Systems

### Cite this

*Journal of the Association of Information Systems*,

*13*(2), 57-87.

**Pure-strategy Nash equilibria of GSP keyword auction.** / Li, Linjing; Zeng, Dajun; Zhao, Huimin.

Research output: Contribution to journal › Article

*Journal of the Association of Information Systems*, vol. 13, no. 2, pp. 57-87.

}

TY - JOUR

T1 - Pure-strategy Nash equilibria of GSP keyword auction

AU - Li, Linjing

AU - Zeng, Dajun

AU - Zhao, Huimin

PY - 2012/2

Y1 - 2012/2

N2 - Despite the tremendous commercial success of generalized second-price (GSP) keyword auctions, it still remains a big challenge for an advertiser to formulate an effective bidding strategy. In this paper, we strive to bridge this gap by proposing a framework for studying pure-strategy Nash equilibria in GSP auctions. We first analyze the equilibrium bidding behaviors by investigating the properties and distribution of all pure-strategy Nash equilibria. Our analysis shows that the set of all pure-strategy Nash equilibria of a GSP auction can be partitioned into separate convex polyhedra based on the order of bids if the valuations of all advertisers are distinct. We further show that only the polyhedron that allocates slots efficiently is weakly stable, thus allowing all inefficient equilibria to be weeded out. We then propose a novel refinement method for identifying a set of equilibria named the stable Nash equilibrium set (STNE) and prove that STNE is either the same as or a proper subset of the set of the well-known symmetrical Nash equilibria. These findings free both auctioneers and advertisers from complicated strategic thinking. The revenue of a GSP auction on STNE is at least the same as that of the classical Vickrey-Clarke-Groves mechanism and can be used as a benchmark for evaluating other mechanisms. At the same time, STNE provides advertisers a simple yet effective and stable bidding strategy.

AB - Despite the tremendous commercial success of generalized second-price (GSP) keyword auctions, it still remains a big challenge for an advertiser to formulate an effective bidding strategy. In this paper, we strive to bridge this gap by proposing a framework for studying pure-strategy Nash equilibria in GSP auctions. We first analyze the equilibrium bidding behaviors by investigating the properties and distribution of all pure-strategy Nash equilibria. Our analysis shows that the set of all pure-strategy Nash equilibria of a GSP auction can be partitioned into separate convex polyhedra based on the order of bids if the valuations of all advertisers are distinct. We further show that only the polyhedron that allocates slots efficiently is weakly stable, thus allowing all inefficient equilibria to be weeded out. We then propose a novel refinement method for identifying a set of equilibria named the stable Nash equilibrium set (STNE) and prove that STNE is either the same as or a proper subset of the set of the well-known symmetrical Nash equilibria. These findings free both auctioneers and advertisers from complicated strategic thinking. The revenue of a GSP auction on STNE is at least the same as that of the classical Vickrey-Clarke-Groves mechanism and can be used as a benchmark for evaluating other mechanisms. At the same time, STNE provides advertisers a simple yet effective and stable bidding strategy.

KW - Generalized second-price

KW - Keyword advertising

KW - Nash equilibrium

KW - Sponsored search

KW - Stability

UR - http://www.scopus.com/inward/record.url?scp=84862302473&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84862302473&partnerID=8YFLogxK

M3 - Article

AN - SCOPUS:84862302473

VL - 13

SP - 57

EP - 87

JO - Journal of the Association of Information Systems

JF - Journal of the Association of Information Systems

SN - 1536-9323

IS - 2

ER -