The Complexities of Advertising Bidding on Amazon
When we think of auctioning sites on the internet, most of us think of Ebay. However, did you know that auctions and bids play an important role in the workings of an equally (perhaps even more) popular e-commerce site, Amazon? When you search a product on Amazon, you may notice that the top listings (or listings throughout product pages) are sponsored. It’s common knowledge that companies on any sort of site will place ads in target areas to try to sell more products to browsers, but how do they compete for the best spots on a webpage? On Amazon, product advertisers who want to place ads partake in live CPC (cost-per-click) auctions every time a consumer searches for a product. These auctions are of the second price type, where the highest bidder pays (almost) what the second-highest bidder bid (1 cent more, to be exact). Amazon specifically uses an upgraded second price auction: the winner is determined by both highest bid and relevancy to the searched keyword(s).
In recent times, though, Amazon has made their auction system even more complex with the addition of campaign bidding strategies. The basis of CPC auctions is that if an ad is placed, the advertiser only pays for it when it gets clicked on. Amazon introduced new strategies that allowed Amazon itself to change advertisers’ bids for ads depending on how likely they think a placed ad will turn into a click and even later, a transaction. The three strategies are “Dynamic Bidding- Down Only”, “Dynamic Bidding- Up and Down”, and “Fixed Bids”. This is how they work. A group of advertisers set bids for ad placement.
Down Only: Let’s say in the advertiser group, Company A wins an initial bid and gets their ad placed at the top of a product listing page. However, they get very few clicks and fewer transactions. Amazon will take note of this and reduce A’s bid for them, by up to 100% (so in some cases, it can reduce a bid to $0 and take them out of the competition).
Up and Down: This works the same as Down Only, except if Company A’s ad does well and gets many clicks and has a higher chance of getting users to buy their products, Amazon can raise A’s bid for them, by up to 100%. Amazon can both increase and reduce bids in this case.
Fixed Bids: Amazon does not analyze how many clicks an ad is getting and will not change a company’s bid according to clicks.
One of the sources I linked below recommends Down Only as the best strategy for advertisers. As someone who has little experience in marketing and related fields, I initially thought Up and Down would save advertisers the most amount of time strategizing, but I learned why it’s not recommended- it generally increases advertising spending and is inefficient. I thought this topic was interesting, as after learning about types of auctions in INFO2040, I didn’t really see why second price auctions were popular. I will also note that this particular situation intertwines auctions and game theory- each advertiser must think carefully about the best campaign bidding strategy for them, but also consider what their competitors may bid and what strategies they may choose.
Sources:
https://advertising.amazon.com/library/videos/campaign-bidding-sponsored-products#:~:text=Amazon%20uses%20an%20auction%2Dbased,%2Dclick%20(CPC)%20advertising.