Monday, March 22, 2010

Reserve prices in ad auctions: a field experiment by Ostrovsky and Schwarz

Reserve Prices in Internet Advertising Auctions: A Field Experiment by Michael Ostrovsky and Michael Schwarz.

"We present the results of a large field experiment on setting reserve prices in auctions for online advertisements, guided by the theory of optimal auction design suitably adapted to the sponsored search setting. Consistent with the theory, following the introduction of new reserve prices revenues in these auctions have increased substantially."

And, from the introduction:
"Reserve prices in the randomly selected "treatment" group were set based on the guidance provided by the theory of optimal auctions, while in the "control" group they were left at the old level of 10 cents per click. The revenues in the treatment group have increased substantially relative to the control group, showing that reserve prices in auctions can in fact play an important role and that theory provides a useful guide for setting them. This increase is especially pronounced for keywords with relatively high search volumes, for keywords in which the theoretically optimal reserve price is relatively high, and for keywords with a relatively small number of bidders."...

"Our paper makes several contributions relative to [earlier] studies. First, it analyzes a much larger and economically important setting, with thousands of keywords and millions (and potentially, given the size of the online advertising industry, billions) of dollars at stake. Consequently, many of the bidders in this setting spend considerable time and resources on optimizing their advertising campaigns. Second, the reserve prices in the experiment are guided by theory, based on the estimated distributions of bidder values. To the best of our knowledge, there are no other papers describing direct practical applications of the seminal results of Myerson (1981) and Riley and Samuelson (1981). Third, unlike the previous studies, the benchmark in our analysis is not a zero reserve price, but the existing reserve price set by the company after a long period of experimentation."

In the conclusion they say that setting optimal reservation prices reduces ads shown by about one per search, but increases search revenue by almost 3%, which is a big deal when multiplied by the enormous numbers of searches.

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