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Bidding Dynamics of Rational Advertisers in Sponsored Search Auctions on the Web

Reddy, Siva Sankar S and Narahari, Y (2007) Bidding Dynamics of Rational Advertisers in Sponsored Search Auctions on the Web. In: Proceedings of the International Conference on Advances in Control and Optimization of Dynamical Systems, ACODS-2007, Bangalore, Feb. 2007, Bangalore.

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In this paper, we address a key problem faced by advertisers in sponsored search auctions on the web: how much to bid, given the bids of the other advertisers, so as to maximize individual payoffs? Assuming the generalized second price auction as the auction mechanism, we formulate this problem in the framework of an infinite horizon alternative-move game of advertiser bidding behavior. For a sponsored search auction involving two advertisers, we characterize all the pure strategy and mixed strategy Nash equilibria. We also prove that the bid prices will lead to a Nash equilibrium, if the advertisers follow a myopic best response bidding strategy. Following this, we investigate the bidding behavior of the advertisers if they use Q-learning. We discover empirically an interesting trend that the Q-values converge even if both the advertisers learn simultaneously.

Item Type: Conference Paper
Keywords: Mechanism Design;Internet Advertising;Sponsored Search Auctions;GSP (Generalized Second Price) Auction; Myopic Best Response Bidding;Q-Learning
Department/Centre: Division of Electrical Sciences > Computer Science & Automation
Date Deposited: 17 Oct 2011 05:36
Last Modified: 17 Oct 2011 05:36
URI: http://eprints.iisc.ac.in/id/eprint/41469

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