Dynamic Reserves for Repeated Second Price Auctions

Abstract

A large fraction of online advertisements are sold via repeated second price auctions. In these auctions, the reserve price is the main tool for the auctioneer to boost revenues. In this work, we investigate the following question: Can changing the reserve prices based on the previous bids improve the revenue of the auction, taking into account the long-term incentives and strategic behavior of the bidders? We show that if the distribution of the valuations is known and satisfies the standard regularity assumptions, then the optimal mechanism has a constant reserve. However, when there is uncertainty in the distribution of the valuations and competition among the bidders, previous bids can be used to learn the distribution of the valuations and to update the reserve prices. We present a simple approximately incentive-compatible and optimal dynamic reserve mechanism that can significantly improve the revenue over the best static reserve in such settings.