Are Truthful Bidders Paying too Much? Efficiency and Revenue in Display Ad Auctions

Abstract

Display ad auctions have become the predominant means to allocate user impressions on a website to advertisers. These auctions are conducted in milliseconds online, whenever a user visits a website. The impressions are typically priced via a simple second-price rule. For single-item auctions, this Vickrey payment rule is known to be incentive-compatible. However, it is unclear whether bidders should still bid truthful in an online auction where impressions (or items) arrive dynamically over time and their valuations are not separable, as is the case with campaign targets or budgets. The allocation process might not maximize welfare and the payments can differ substantially from those paid in an offline auction with a Vickrey-Clarke-Groves (VCG) payment rule or also competitive equilibrium prices. We study the properties of the offline problem and model it as a mathematical program. In numerical experiments, we find that the welfare achieved in the online auction process with truthful bidders is high compared to the theoretical worst-case efficiency, but that the bidders pay significantly more on average compared to what they would need to pay in a corresponding offline auction in thin markets with up to four bidders. However, incentives for bid shading in these second-price auctions decrease quickly with additional competition and bidders risk losing.