Dynamics of bid optimization in online advertisement auctions

We consider the problem of online keyword advertising auctions among multiple bidders with limited budgets, and study a natural bidding heuristic in which advertisers attempt to optimize their utility by equalizing their return-on-investment across all keywords. We show that existing auction mechanisms combined with this heuristic can experience cycling (as has been observed in many current systems), and therefore propose a modified class of mechanisms with small random perturbations. This perturbation is reminiscent of the small time-dependent perturbations employed in the dynamical systems literature to convert many types of chaos into attracting motions. We show that the perturbed mechanism provably converges in the case of first-price auctions and experimentally converges in the case of second-price auctions. Moreover, the point of convergence has a natural economic interpretation as the unique market equilibrium in the case of first-price mechanisms. In the case of second-price a...

• Type: Conference
• Year: 2007
• Where: WWW
• Authors: Christian Borgs, Jennifer T. Chayes, Nicole Immorlica, Kamal Jain, Omid Etesami, Mohammad Mahdian
• Keywords: Internet Technology, Market Equilibrium, Small Time-dependent Perturbations, Unique Market Equilibrium, WWW 2007