Optimal revenue-sharing double auctions with applications to ad exchanges

Abstract

E-commerce web-sites such as Ebay as well as advertising exchanges (AdX) such as DoubleClick's, RightMedia, or AdECN work as intermediaries who sell items (e.g. page-views) on behalf of a seller (e.g. a publisher) to buyers on the opposite side of the market (e.g., advertisers). These platforms often use fixed-percentage sharing schemes, according to which (i) the platform runs an auction amongst buyers, and (ii) gives the seller a constant-fraction (e.g., 80%) of the auction proceeds. In these settings, the platform faces asymmetric information regarding both the valuations of buyers for the item (as in a standard auction environment) as well as about the seller's opportunity cost of selling the item. Moreover, platforms often face intense competition from similar market places, and such competition is likely to favor auction rules that secure high payoffs to sellers. In such an environment, what selling mechanism should platforms employ? Our goal in this paper is to study optimal mechanism design in settings plagued by competition and two-sided asymmetric information, and identify conditions under which the current practice of employing constant cuts is indeed optimal.