Ex ante information and the design of keyword auctions

De Liu, Jianqing Chen, Andrew B. Whinston

Research output: Contribution to journalArticlepeer-review

66 Scopus citations


Keyword advertising, including sponsored links and contextual advertising, powers many of today's online information services such as search engines and Internet-based emails. This paper examines the design of keyword auctions, a novel mechanism that keyword advertising providers such as Google and Yahoo! use to allocate advertising slots. In our keyword auction model, advertisers bid their willingness-to-pay per click on their advertisements, and the advertising provider can weight advertisers' bids differently and require different minimum bids based on advertisers' click-generating potential. We study the impact and design of such weighting schemes and minimum-bid policies. We find that weighting scheme determines how advertisers with different click-generating potential match in equilibrium. Minimum bids exclude low-valuation advertisers and at the same time may distort the equilibrium matching. The efficient design of keyword auctions requires weighting advertisers' bids by their expected click-through-rates, and requires the same minimum weighted bids. The revenue-maximizing weighting scheme may or may not favor advertisers with low click-generating potential. The revenue-maximizing minimum-bid policy differs from those prescribed in the standard auction design literature. Keyword auctions that employ the revenue-maximizing weighting scheme and differentiated minimum bid policy can generate higher revenue than standard fixed-payment auctions. We draw managerial implications for pay-per-click and other pay-for-performance auctions and discuss potential applications to other areas.

Original languageEnglish (US)
Pages (from-to)133-153
Number of pages21
JournalInformation Systems Research
Issue number1
StatePublished - Mar 2010


  • Google
  • Keyword advertising
  • Keyword auctions
  • Minimum bid
  • Sponsored links
  • Weighted unit-price auctions
  • Weighting scheme
  • Yahoo!

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