Optimal reserve prices in weighted GSP auctions

Most search engines use the weighted Generalized Second Price (wGSP) auction to sell keyword-based text ads, generating billions of dollars of advertising revenue every year. Designing and implementing near-optimal reserve prices for these wGSP auctions are naturally important problems for both academia and industry. In this paper, we show how to calculate and implement the near-optimal reserve price of the wGSP mechanism in realistic settings. Unlike reserve prices in standard single-item auctions, optimal reserve prices in wGSP auctions are discriminatory, different even for advertisers bidding on the same keyword. The optimal reserve price results can be extended to support CPA/CPC/CPM1 hybrid auctions. Our simulations indicate that setting a proper reserve price will transfer some bidder utility (payoff) to auctioneer utility, resulting in higher revenue for the search engine. We describe a practical methodology to implement optimal reserve prices in production systems. (C) 2014 Elsevier B. V. All rights reserved.