Optimal Reserve Prices in Weighted GSP Auctions: Theory and Experimental Methodology

The Generalized Second Price Auction (GSP) is the dominant search-keyword auction mechanism of the past decade, and sponsored search ad auctions are one of the most successful Internet business models [4, 14]. The weighted GSP considers both the quality of each ad and also the corresponding bid in the auction mechanism, and most search engines use the weighted GSP to sell ad positions.We show how to determine the optimal reserve price in the weighted GSP mechanism and we prove that the auction with this reserve price is a Myerson optimal auction [10]. The optimal price can be extended to support the CPA/CPC/CPM hybrid auction. Simulations show that setting a relatively high reserve price causes bidders to transfer more utility (surplus) to payment, resulting in higher revenue for the search engine. Finally, we describe a practical procedure for computing optimal reserve prices in production systems.