For-profit mediators in sponsored search advertising

TL;DR

This paper studies for-profit mediators in sponsored search auctions, showing they can improve advertiser payoffs, generate revenue for mediators, and coexist with direct participants, revealing complex economic interactions.

Contribution

It introduces a game-theoretic model of incentive-driven, for-profit mediators in sponsored search auctions, highlighting their potential benefits and strategic advantages.

Findings

Advertisers can improve payoffs using mediators.

Mediators can profit by managing advertiser bids.

The model shows coexistence of mediators and direct bidders.

Abstract

A mediator is a well-known construct in game theory, and is an entity that plays on behalf of some of the agents who choose to use its services, while the rest of the agents participate in the game directly. We initiate a game theoretic study of sponsored search auctions, such as those used by Google and Yahoo!, involving {\em incentive driven} mediators. We refer to such mediators as {\em for-profit} mediators, so as to distinguish them from mediators introduced in prior work, who have no monetary incentives, and are driven by the altruistic goal of implementing certain desired outcomes. We show that in our model, (i) players/advertisers can improve their payoffs by choosing to use the services of the mediator, compared to directly participating in the auction; (ii) the mediator can obtain monetary benefit by managing the advertising burden of its group of advertisers; and (iii) the payoffs of the mediator and the advertisers it plays for are compatible with the incentive constraints from the advertisers who do dot use its services. A simple intuition behind the above result comes from the observation that the mediator has more information about and more control over the bid profile than any individual advertiser, allowing her to reduce the payments made to the auctioneer, while still maintaining incentive constraints. Further, our results indicate that there are significant opportunities for diversification in the internet economy and we should expect it to continue to develop richer structure, with room for different types of agents to coexist.