Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords

TLDR

GSP resembles VCG but lacks a dominant‑strategy equilibrium, so truth‑telling is not an equilibrium. The study examines the generalized second‑price auction used by search engines to sell online advertising. The authors model GSP as a generalized English auction and prove it has a unique equilibrium. This equilibrium is ex post and yields payoffs identical to the VCG dominant‑strategy equilibrium. JEL codes: D44, L81, M37.

Abstract

We investigate the “generalized second-price” (GSP) auction, a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG. (JEL D44, L81, M37)