Robust Auction Design in the Auto-bidding World

TL;DR

This paper demonstrates that appropriately set reserve prices in auctions with value-maximizing bidders can enhance both revenue and total welfare, and these benefits are robust across different bidder types and auction formats.

Contribution

It introduces a novel understanding of reserve prices in auto-bidding markets, showing they can improve welfare and revenue simultaneously across various auction mechanisms.

Findings

Reserve prices improve total welfare and revenue in auto-bidding auctions.

Reserve prices are effective across different bidder types without prior knowledge.

Combining reserve prices with additive boosts further enhances auction outcomes.

Abstract

In classic auction theory, reserve prices are known to be effective for improving revenue for the auctioneer against quasi-linear utility maximizing bidders. The introduction of reserve prices, however, usually do not help improve total welfare of the auctioneer and the bidders. In this paper, we focus on value maximizing bidders with return on spend constraints -- a paradigm that has drawn considerable attention recently as more advertisers adopt auto-bidding algorithms in advertising platforms -- and show that the introduction of reserve prices has a novel impact on the market. Namely, by choosing reserve prices appropriately the auctioneer can improve not only the total revenue but also the total welfare. Our results also demonstrate that reserve prices are robust to bidder types, i.e., reserve prices work well for different bidder types, such as value maximizers and utility maximizers, without using bidder type information. We generalize these results for a variety of auction mechanisms such as VCG, GSP, and first-price auctions. Moreover, we show how to combine these results with additive boosts to improve the welfare of the outcomes of the auction further. Finally, we complement our theoretical observations with an empirical study confirming the effectiveness of these ideas using data from online advertising auctions.