A sponsored search auction (SSA), also known as a keyword auction, is an indispensable part of the business model of modern web hosts.
It refers to results from a search engine that are not output by the main search algorithm, but rather clearly separate advertisements paid for by third parties.
These advertisements are typically related to the terms for which the user searched.
Prior to 1998, many advertisements were charged by impression, as it was the easiest metric to calculate.
In 1998, GoTo.com, Inc debuted a pay-per-click charging system, with pricing and slot placement determined by an auction.
GoTo faced bidders who were constantly changing their bid in response to new information and changing information from other bidders.
Currently, charging per action is a common pricing scheme in affiliate networks, such as the Amazon Associates Program.
In 2002, Google Ads began using a second price auction to sell the single advertisement slot.
Shortly thereafter, pages had multiple advertisements slots, which were allocated and sold via generalized second-price auction (GSP) auction, the natural generalization of a second price, single item, multi bidder auction.
[1] Marketing activities related to the sponsored search are increasingly contracted out to specialized digital marketing agencies (DMAs).
Thousands of DMAs operate in the US market, but most of them belong to one of the seven agency networks, which also bid on behalf of their clients for keywords for sponsored search.
An issue with GSP is that it's not a truthful auction and it is not the optimal strategy.
However, if bidder 1 decides to lie and reports a value of $4 instead then his utility would be
which makes GSP untruthful and bidders have an incentive to lie.
Google uses a minor variant of GSP to auction off advertisement slots.
Advertisements that have a history of high click through rates, are geographically targeted at the user, or have a high quality landing page may also be thought of as having higher quality.
[4] Google assigns a numeric “quality” score
Slots are still assigned in decreasing rank order.
) the minimum price for which, if it was their bid, would keep them in their current rank:
However, some websites use VCG as their auction mechanism, most notably Facebook.