KDD talk on advertising auctions

Michael Schwarz from Yahoo Research gave an invited talk at KDD 2008 on "Internet Advertising and Optimal Auction Design".

Much of the talk was background on first and second price auctions, but a particularly good discussion came at the end when Michael was talking about optimal setting of reserve prices for auctions.

A reserve price is the minimum bid for an advertiser to win an auction. Michael discussed how setting a reserve price correctly can significantly improve advertising revenue.

He did not cover the assumptions behind this claim in his talk, but details are available from his 2007 paper, "Optimal Auction Design in a Multi-unit Environment" (PDF). Briefly, setting the reserve price carefully can substantially increase advertising revenue when there are only a few bidders and when most bidders value a click well above the normal reserve price (e.g. most advertisers get $1 of value from a click but the default reserve price is $.05).

Michael also described a non-obvious effect where higher reserve prices indirectly impact top bidders because of price pressure from the now higher lower bids. Again, this is primarily is an issue of the reserve price substituting for lack of competition in the bidding, but still a useful thing to note.

After the talk, I chatted a bit with Michael about optimizing the reserve price for things other than immediate revenue. For example, we might want to optimize reserve price for user satisfaction, setting the reserve price at a level that effectively represents a high cost of user attention and filters out ads that users do not find worthwhile. Or, we might want to set our reserve price lower in the long tail of advertising keywords, making it cheaper (and bearing some of the risk) for advertisers as they try to gather information about how well their ads might work on more obscure keywords.

By the way, if you liked this post, you might also like one of Michael's other papers, "Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords" (PDF). It is a fun paper that describes how current GSP advertising auctions do not actually force truth telling. The problem is rooted in the way there are multiple positions available and, if the lower positions still generate a good number of clicks, it can be advantageous for advertisers to offer lower bids.