Adverse Selection and Auction Design for Internet Display Advertising

Abstract

We model an online display advertising environment with brand advertisers and better-informed performance advertisers, and seek an auction mechanism that is strategy-proof, anonymous and insulates brand advertisers from adverse selection. We find that the only such mechanism that is also false-name proof assigns the item to the highest bidding performance advertiser only when the ratio of the highest bid to the second highest bid is sufficiently large. For fat-tailed match-value distributions, this new mechanism captures most of the gains from good matching and improves match values substantially compared to the common practice of setting aside impressions in advance.