Equilibrium Selection, Inefficiency, and Instability in Internet Advertising Auctions

This paper studies equilibrium selection in the generalized second price auction, employed by major search engines to sell online advertisement positions. We perturb the baseline model by introducing a bidder whose bid and participation are random (noise bidder). In this model, an efficient equilibrium is essentially unique, if exists, and induces an allocation not equivalent to that of the VCG mechanism. This is in contrast to predictions of previous studies, except for a special case that the click-through rates of positions decrease at a constant rate. This paper fully characterizes the condition on click-through rates that guarantees the existence of an efficient equilibrium with arbitrary per-click values of advertisers. This paper also investigates questions concerning inefficient equilibria, revenues, stable assignments, and relationship with trembling-hand perfect equilibrium