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Mechanism Design for Sponsored Search Auctions

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Game Theoretic Problems in Network Economics and Mechanism Design Solutions

Part of the book series: Advanced Information and Knowledge Processing ((AI&KP))

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The sponsored search auction problem was introduced briefly as an example in Chapter 1. In this chapter, we study this problem in more detail to illustrate a compelling application of mechanism design. We first describe a framework to model this problem as a mechanism design problem under a reasonable set of assumptions. Using this framework, we describe three well known mechanisms for sponsored search auctions – Generalized First Price (GFP), Generalized Second Price (GSP), and Vickrey-Clarke-Groves (VCG). We then design an optimal auction mechanism by extending Myerson’s optimal auction mechanism for a single indivisible good which was discussed in the previous chapter. For this, we impose the following well known requirements, which we feel are practical requirements for sponsored search auction, for any mechanism in this setting – revenue maximization, individual rationality, and Bayesian incentive compatibility. We call this mechanism the Optimal (OPT) mechanism. We then make a comparative study of three mechanisms, namely GSP, VCG, and OPT, along four different dimensions – incentive compatibility, expected revenue earned by the search engine, individual rationality, and computational complexity. This chapter is a detailed extension of the results presented in [22], [23].

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Author information

Authors and Affiliations

  1. Indian Institute of Science, Department of Computer Science & Automation, 560012, Bangalore, India

    Y. Narahari

  2. Indian Institute of Science, Department of Computer Science & Automation, 560012, Bangalore, India

    Ramasuri Narayanam

  3. IBM India Research Lab, Embassy Golf Links Business Park, 560071, Bangalore, India

    Dinesh Garg

  4. Indian Institute of Science, Department of Computer Science & Automation, 560012, Bangalore, India

    Hastagiri Prakash

Authors
  1. Y. Narahari
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  2. Ramasuri Narayanam
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  3. Dinesh Garg
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  4. Hastagiri Prakash
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Corresponding authors

Correspondence to Y. Narahari or Hastagiri Prakash .

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© 2009 Springer-Verlag London

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Narahari, Y., Narayanam, R., Garg, D., Prakash, H. (2009). Mechanism Design for Sponsored Search Auctions. In: Game Theoretic Problems in Network Economics and Mechanism Design Solutions. Advanced Information and Knowledge Processing. Springer, London. https://doi.org/10.1007/978-1-84800-938-7_3

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