*Keyword Prices: Why “Second Price” Auctions? Prof. Henzinger’s Inaugural Lecture @ The University of Vienna

Prof. Dr. Monika Henzinger, who has previously worked as the head of the research department at Google (1999-2005) and taught at the Cornell University, as well as at the Eidgenössischen Technischen Hochschule Lausanne (2005-2009), held her inaugural lecture at the University of Vienna on the 17th of March. Henzinger’s lecture also provided a splendid introduction into the auction systems used by search engines to price their ads. I am thankful that Henzinger was so kind to forward me her slides and allow me to publish parts of them on my blog.

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First some history: Ever since first dealing with the topic of keyword advertising  I was slightly confused as to why the auctions were called “second price auctions“, when in fact advertisers on Google (or buyers at eBay) were never actually charged for their bid but always for the bid of the second highest bidder. Confused? Continue reading!

Search engines around the time of Google’s start were highly polluted with advertising spam and thus searches back in 99/00 heavily relied on indexes, such as Yahoo! and dict.org. A fact that is not widely known is that the generally “doomed” principle of Paid Placements (ads inside the search results) were originally a quite clever way of fighting spam. Thus, the idea of paid-placement search engines was that if an advertiser is willing to pay a minimal amount of money to be listed, it could pretty much be ruled out that the ad displayed would be SPAM. Thus, ToGo.com had no problems even admitting that it displayed ads in its search results. (please see below)

Hargittai, The Role of Expertise in Navigating Links of Influence, in Turow/Tsui (Ed), The Hyperlinked Society: Questioning Connections in the Digital Age, Michigan Press (2008) 85ff. Green elements added by Austrotrabant

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When Google started its advertising platform in Oct 2000 they used a similar service, but clearly separating ads from the (organic) search results..

As most of you will know, keywords are sold on an “auction” basis. There a different kinds of auctions:.

Open or closed bid auctions:

Open auctions are auctions where bidders can adjust their bids. The price is called out by the auctioneer in ascending or descending order.

Sealed auctions are auctions were bidders can just make one bid. The name seems to stem from secret bids, submitted in “sealed envelopes”..

“First price or second price” auctions:

First price” auctions are auctions where a bidders pay the amount they bid.

Second price auctions” are auctions where the highest bidder pays what the second highest bidder bid.


Henzinger in her speech summarized the different auction combinations in this way:

Henzinger, Inaugural Lecture at the University of Vienna, 17.03.2010

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An open auction would nor be feasible for internet ads, as the bidders/advertisers are geographically distributed and unpredictably start and end their campaigns. Thus, sealed” (bid) auctions are used for selling keywords..

The issue of first or second price auctions is also a very interesting one. As Henzinger reported, using “first price” auctions would lead to automated bidders (bots) frequently adjusting their bids, which leads to an instability of prices. In the image below a bot would start bidding for the keyword at 5 USD and stop bidding at 10 USD. As this influences the other bots, they would also adjust their bids, leading to instability.

Edelman, Ostrovsky: Strategic bidder behaviour in sponsored search auctions. Decision Support Systems, 2007

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As such an instability is generally undesirable and furthermore makes it difficult for advertisers ad advertising companies to predict the spendings etc., the second price” model was chosen, providing more stability. Please see below how the “second price” model works:

Henzinger, Inaugural Lecture at the University of Vienna, 17.03.2010. Green arrows added by Austrotrabant

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This was my very basic summary of Henzinger’s lecture. The lecture of course didn’t stop there but went on, exploring the needs of the advertisers (interest in certain ad positions, predictability of daily/weekly spendings, etc.) and advertising companies (minimum prices for ads, “many (and more) satisfied advertisers”, etc.) and actually proposing a model, providing a bidder-optimal solution which is “truthful“. [I really hope I got that right, but hey, I am JUST a jurist and not good with maths at all…]

Henzinger furthermore also touched some more interesting issues, such as an advertiser solely wishing to be displayed onto of his competitor, advertisers wishing to be placed multiple times on a SERP, advertisers wanting to share ad-space or advertisers having certain interests (branding vs. conversion). A topic Henzinger unfortunately didn’t touch on at all was the quality index of ads, but for some reason the time for questions was quite limited.

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All in all I really enjoyed Henzinger‘s talk and having read her CV I am deeply impressed and happy at the same time that the university of Vienna obviously managed to convince such a charismatic and smart person to work for the university of Vienna😉

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