Article | American Economic Review | May 2010

Optimal Auction Design and Equilibrium Selection in Sponsored Search Auctions

by Benjamin Edelman and Michael Schwarz

Abstract

We characterize the optimal (revenue maximizing) auction for sponsored search advertising. We show that a search engine's optimal reserve price is independent of the number of bidders and independent of the rate at which click-through rate declines over positions. We separate the effects of reserve price increases into direct effects (on the low bidder) and indirect effects (on others), and we show that most of the incremental revenue from setting reserve price optimally comes from indirect effects.

Keywords: Auctions; Revenue; Advertising; Search Technology; Price; Bids and Bidding;

Citation:

Edelman, Benjamin, and Michael Schwarz. "Optimal Auction Design and Equilibrium Selection in Sponsored Search Auctions." American Economic Review 100, no. 2 (May 2010): 597–602. (First circulated in 2006 as Optimal Auction Design in a Multi-unit Environment: The Case of Sponsored Search Auctions.)