Internet Advertising and the Generalized Second Price Auction

Internet Advertising and the Generalized Second Price Auction

By
Benjamin Edelman, Michael Ostrovsky, Michael Schwarz
American Economic Review.
2007, Vol. 97, Issue 1, Pages 242-259

We investigate the "generalized second-price" (GSP) auction, a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG.