On Revenue in the Generalized Second Price Auction

The Generalized Second Price (GSP) auction is the primary auction used for selling sponsored search advertisements. In this paper we consider the revenue of this auction at equilibrium. We prove that if agent values are drawn from identical regular distributions, then the GSP auction paired with an appropriate reserve price generates a constant fraction (1/6th) of the optimal revenue.

In the full-information game, we show that at any Nash equilibrium of the GSP auction obtains at least half of the revenue of the VCG mechanism excluding the payment of a single participant. This bound holds also with any reserve price, and is tight.

Finally, we consider the tradeoff between maximizing revenue and social welfare. We introduce a natural convexity assumption on the click-through rates and show that it implies that the revenue-maximizing equilibrium of GSP in the full information model will necessarily be envy-free. In particular, it is always possible to maximize revenue and social welfare simultaneously when click-through rates are convex. Without this convexity assumption, however, we demonstrate that revenue may be maximized at a non-envy-free equilibrium that generates a socially inefficient allocation.