Optimizing Floors in First Price Auctions: an Empirical Study of Yahoo Advertising

TL;DR

This paper presents an empirical study on setting reserve prices in first-price auctions for Yahoo advertising, demonstrating how the model increases revenue by influencing bidder behavior.

Contribution

The paper introduces a new model for setting floors in first-price auctions that accounts for industry-specific restrictions and demonstrates its successful implementation at Yahoo.

Findings

Incremental revenue of +1.3% on display inventory

Incremental revenue of +2.5% on video inventory

Model influences bidder behavior to increase publisher revenue

Abstract

Floors (also known as reserve prices) help publishers to increase the expected revenue of their ad space, which is usually sold via auctions. Floors are defined as the minimum bid that a seller (it can be a publisher or an ad exchange) is willing to accept for the inventory opportunity. In this paper, we present a model to set floors in first price auctions, and discuss the impact of its implementation on Yahoo sites. The model captures important characteristics of the online advertising industry. For instance, some bidders impose restrictions on how ad exchanges can handle data from bidders, conditioning the model choice to set reserve prices. Our solution induces bidders to change their bidding behavior as a response to the floors enclosed in the bid request, helping online publishers to increase their ad revenue. The outlined methodology has been implemented at Yahoo with remarkable results. The annualized incremental revenue is estimated at +1.3% on Yahoo display inventory, and +2.5% on video ad inventory. These are non-negligible numbers in the multi-million Yahoo ad business.