Bidding to the Top: VCG and Equilibria of Position-Based Auctions

Many popular search engines run an auction to determine the placement of advertisements next to search results. Current auctions at Google and Yahoo! let advertisers specify a single amount as their bid in the auction. This bid is interpreted as the maximum amount the advertiser is willing to pay per click on its ad. When search queries arrive, the bids are used to rank the ads linearly on the search result page. Advertisers seek to be high on the list, as this attracts more attention and more clicks. The advertisers pay for each user who clicks on their ad, and the amount charged depends on the bids of all the advertisers participating in the auction.

We study the problem of ranking ads and associated pricing mechanisms when the advertisers not only specify a bid, but additionally express their preference for positions in the list of ads. In particular, we study

prefix position auctions

where advertiser

i

can specify that she is interested only in the top

κ

i

positions.

We present a simple allocation and pricing mechanism that generalizes the desirable properties of current auctions that do not have position constraints. In addition, we show that our auction has an

envy-free

[1] or

symmetric

[2] Nash equilibrium with the same outcome in allocation and pricing as the well-known truthful Vickrey-Clarke-Groves (VCG) auction. Furthermore, we show that this equilibrium is the best such equilibrium for the advertisers in terms of the profit made by each advertiser. We also discuss other position-based auctions.