Diversification in the Internet Economy:The Role of For-Profit Mediators

TL;DR

This paper explores how for-profit mediators influence the sponsored search market, showing they can improve advertiser payoffs and revenue, and that auctioneers struggle to prevent such mediation without revenue loss.

Contribution

It introduces and compares auctioneer-based and mediator-based models, demonstrating the advantages of mediator-based capacity expansion and analyzing strategic mediator behavior.

Findings

Mediator-based models outperform auctioneer-based models in revenue and efficiency.

Advertisers benefit from mediators by increasing their payoffs.

Mediators can profit without violating incentive constraints, challenging mechanism design.

Abstract

We investigate market forces that would lead to the emergence of new classes of players in the sponsored search market. We report a 3-fold diversification triggered by two inherent features of the sponsored search market, namely, capacity constraints and collusion-vulnerability of current mechanisms. In the first scenario, we present a comparative study of two models motivated by capacity constraints - one where the additional capacity is provided by for-profit agents, who compete for slots in the original auction, draw traffic, and run their own sub-auctions, and the other, where the additional capacity is provided by the auctioneer herself, by essentially acting as a mediator and running a single combined auction. This study was initiated by us in \cite{SRGR07}, where the mediator-based model was studied. In the present work, we study the auctioneer-based model and show that this model seems inferior to the mediator-based model in terms of revenue or efficiency guarantee due to added capacity. In the second scenario, we initiate a game theoretic study of current sponsored search auctions, involving incentive driven mediators who exploit the fact that these mechanisms are not collusion-resistant. In particular, we show that advertisers can improve their payoffs by using the services of the mediator compared to directly participating in the auction, and that the mediator can also obtain monetary benefit, without violating incentive constraints from the advertisers who do not use its services. We also point out that the auctioneer can not do very much via mechanism design to avoid such for-profit mediation without losing badly in terms of revenue, and therefore, the mediators are likely to prevail.