Abstract

The sponsored search auction is a successful pricing mechanism which helps search engine companies sell navigation service to advertisers and generate multibillion dollar revenue. For the two popular sponsored search auctions—the Generalized First Price (GFP) auction and the Generalized Second Price (GSP) auction—current consensus in both the industry and academia is that the GSP auction is more stable than the GFP auction. Specifically, in the GSP auction, bidders are less likely to “game the system”, meaning that an individual bidder will change his bid less frequently and his bid range will be smaller. This paper examines this prevailing belief using a Regression Discontinuity Design (RDD) approach and finds that after bidders switch to the GSP auction, they actually change their bid 19% more frequently and increase their daily bid range by 46%. The paper suggests that the prevailing automated bidding strategies should not be ignored in explaining bidders’ behavior.

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