Sponsored Questions and How to Auction Them

TL;DR

This paper explores the integration of sponsored prompts in conversational AI for online advertising, proposing mechanisms to optimize their allocation and interaction with traditional ad auctions.

Contribution

It introduces a formal model for sponsored suggestion slots, analyzing joint versus modular optimization approaches, and demonstrates the effectiveness of VCG mechanisms in this context.

Findings

VCG mechanism achieves efficient, truthful joint optimization.

Modular approach has unbounded Price of Anarchy.

Proposed model guides design of interactive advertising platforms.

Abstract

Online platforms connect users with relevant products and services using ads. A key challenge is that a user's search query often leaves their true intent ambiguous. Typically, platforms passively predict relevance based on available signals and in some cases offer query refinements. The shift from traditional search to conversational AI provides a new approach. When a user's query is ambiguous, a Large Language Model (LLM) can proactively offer several clarifying follow-up prompts. In this paper we consider the following: what if some of these follow-up prompts can be ``sponsored,'' i.e., selected for their advertising potential. How should these ``suggestion slots'' be allocated? And, how does this new mechanism interact with the traditional ad auction that might follow? This paper introduces a formal model for designing and analyzing these interactive platforms. We use this model to investigate a critical engineering choice: whether it is better to build an end-to-end pipeline that jointly optimizes the user interaction and the final ad auction, or to decouple them into separate mechanisms for the suggestion slots and another for the subsequent ad slot. We show that the VCG mechanism can be adopted to jointly optimize the sponsored suggestion and the ads that follow; while this mechanism is more complex, it achieves outcomes that are efficient and truthful. On the other hand, we prove that the simple-to-implement modular approach suffers from strategic inefficiency: its Price of Anarchy is unbounded.