Tractable Equilibria in Sponsored Search with Endogenous Budgets

Abstract

Given the scale of the sponsored search market, it is practically important yet technically difficult to understand the interplay between bidders and the ad network and its effect on the long-run state of the market. Although typical equilibrium models account for bidders strategizing over the individual bids they submit to the auctions, they ignore that bidders also strategically set their campaign budgets. In “Tractable Equilibria in Sponsored Search with Endogenous Budgets,” F. Ciocan and K. Iyer ask how this additional strategic layer affects market operation and prove that endogenizing budgets surprisingly yields simple and interpretable equilibria. Namely, these equilibria generate quasi-truthful bidding strategies guaranteeing bidders an ROI exceeding their cost per dollar of committed budget. Additionally, the ad network’s optimal allocation policy becomes greedy with high probability. Thus, in this equilibrium, the ad network need not solve computationally challenging, large-scale linear optimization problems typically required under exogenous budgets.