The value of location in keyword auctions

Sponsored links on search engines are an emerging advertising tool, whereby a number of slots are put on sale through keyword auctions. This is also known as contextual advertising. Slot assignment and pricing in keyword auctions are then essential for the search engine’s management since provide the main stream of revenues, and are typically accomplished by the Generalized Second Price (GSP) mechanism. In GSP the price of slots is a monotone function of the slot location, being larger for the highest slots. Though a higher location is associated with larger revenues, the lower costs associated with the lowest slots may make them more attractive for the advertiser. The contribution of this research is to show, by analytical and simulation results based on the theory of order statistics, that advertisers may not get the optimal slot they aim at (the slot maximizing their expected profit) and that the GSP mechanism may be unfair to all the winning bidders but the one who submitted the lowest bid.