Strategic Bidder Behavior in Sponsored Search Auctions

Edelman, Benjamin, and Michael Ostrovsky. “Strategic Bidder Behavior in Sponsored Search Auctions.” Decision Support Systems 43, no. 1 (February 2007): 192-198. (Winner of Emerald Citations of Excellence.)

We examine sponsored search auctions run by Overture (now part of Yahoo!) and Google and present evidence of strategic bidder behavior in these auctions. Between June 15, 2002, and June 14, 2003, we estimate that Overture’s revenue from sponsored search might have been higher if it had been able to prevent this strategic behavior. We present a specific alternative mechanism that could reduce the amount of strategizing by bidders, raise search engines’ revenue, and also increase the overall efficiency of the market. We conclude by showing that advertisers’ strategic behavior has not disappeared over time; rather, such behavior remains present on both search engines.