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, no. 1 (March 2007): 242-259. (Winner of the 2013 Prize in Game Theory and Computer Science from the Game Theory Society for “the best paper at the interface of game theory and computer science in the last decade”.)
We investigate the “generalized second-price” auction (GSP), a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to the GSP and show that it has a unique equilibrium. This is an ex post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG.