AbstractThe “generalized second-price auction” is widely employed to sell internet advertising positions and has many equilibria. Analysis of this auction has assumed that myopic players commonly know each others’ position values, and that the resulting equilibrium play is “locally envy-free”. Here, I argue that the appropriate refinement of Nash equilibrium for this setting is evolutionary stability, and show that it implies that an equilibrium is locally envy-free if the whole population of players bids in each auction and the set of possible bids is not too coarse. However, not all locally envy-free equilibria are evolutionarily stable in this case, as I show by example for the popular Vickrey–Clarke–Groves outcome. The existence of evolutionarily stable equilibrium is established when one position is auctioned, as well as for two positions and a large number of bidders.
Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords