Adverse inclusion of asymmetric advertisers in position auctions

Abstract

Product listing platforms commonly use generalized second-price auctions to select competing advertisers for limited ad positions. However, when advertisers are asymmetric, position auctions may confound the post-auction competition structure and thus endogenize the bidders’ values of the ad positions. We build an analytical model to examine the impact of position auctions on an asymmetric market structure, which consists of a mass marketer and two specialized advertisers of heterogeneous quality efficiencies. The advertisers bid for two ad slots and then compete for the market in price and quality. We find that the asymmetric market structure may increase the uncertainty of the auction outcomes, which then may induce the advertisers to underbid using a conservative strategy profile in the locally-envy free equilibrium. Consequently, the auction outcome may adversely include the less-efficient specialized advertiser. This result is stronger than the position paradox in the classic auction literature, as the advertiser with a competitive advantage may be driven out and obtain zero profit.