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Nowadays, it is impossible to browse the internet without an ad popping up. Prior to learning about sponsored search markets in lecture, I always wondered how advertisements worked, specifically how revenue was generated. Prior to taking Networks, I didn’t know how prevalent it was for various markets to use auctioning as an optimal decision-making tool. One such market that uses auctioning as a decision-making tool is the internet advertising market. 

The Stanford Graduate School of Business carried out a study to assess how Generalized Second-Price (GSP) auctioning model functioned in real-world markets. (At the time this study was published, which was in 2007,  this method had never been analyzed before). In their work, Edelman, Ostrovsky, and Schwarz find that “GSP does not have an equilibrium in dominant strategies and “truth-telling” is not an equilibrium of GSP” (Edelman, Ostrovsky, and Schwarz). The economists argue that GSP is a method that came into existence as a result of “inefficient market institutions” (Edelman, Ostrovsky, and Schwarz). This discovery is surprising since it is so widely used in the online advertising industry. Despite this, major tech companies like Google and Yahoo!, continue to employ GSP mechanisms rather than the Vickrey-Clarke-Groves (VCG) method, which is a better method to use according to the economists (Edelman, Ostrovsky, and Schwarz). The authors explain that it would be costly for the tech giants to convert methods and that the switch would lower revenue.

This article furthers my understanding of the sponsored search market concepts discussed in class because it talks about how there are companies like Google and Yahoo! who prefer other market-matching behaviors despite the fact that there is evidence to suggest a better/more efficient model. In class, we often talk about dominant strategies and models that are considered to be optimal: it makes it easy to not consider other options. As a result of reading this article, I will challenge myself to think about other deviating strategies and how they could be successful.



Edelman, Benjamin, Michael Ostrovsky, and Michael Schwarz. “Internet advertising and the generalized second-price auction: Selling billions of dollars worth of keywords.” American economic review 97.1 (2007): 242-259.


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