Doctoral Student
Hoan Lee
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Working Paper
| HBS Working Paper Series
| 2010
Competing Ad Auctions
Itai Ashlagi, Benjamin G. Edelman and Hoan Lee
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.
Keywords: Online Advertising;
Auctions;
Market Participation;
Market Platforms;
Mathematical Methods;
Competition;
Citation: Ashlagi, Itai, Benjamin G. Edelman, and Hoan Lee. " Competing Ad Auctions." Harvard Business School Working Paper, No. 10–055, January 2010. (Revised May 2010, February 2011.)
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Working Paper
| HBS Working Paper Series
| 2008
CPC/CPA Hybrid Bidding in a Second Price Auction
Benjamin G. Edelman and Hoan Lee
We develop a model of online advertising in which each advertiser chooses from multiple advertising measurement metrics - paying either for each click on its ads (CPC), or for each purchase that follows an ad‐click (CPA). Our analysis extends classic auction results by allowing players to make bids using two different pricing schemes, while the driving information for bidders' endogenous selection - the conversion rate - is hidden from the seller. We show that the advertisers with the most productive sites prefer to pay CPC, while advertisers with lower quality sites prefer to pay CPA - a result that may be viewed as counterintuitive since low quality sites cannot proudly tout their conversion rates. This result holds even if an ad platform's assessment of site quality is correct in expectation. We also show that by offering both CPC and CPA, an ad platform can weakly increase its revenues compared to offering either alternative alone.
Keywords: Online Advertising;
Auctions;
Bids and Bidding;
Measurement and Metrics;
Quality;
Mathematical Methods;
Web Sites;
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