Modelling Externalities in Keyword Auctions: Understanding Competition in On-line Search Advertising

Sponsored search has grown to be an important share of the advertisement market and a major income source for large Internet companies. Its success relies not only on the explosive Internet use but also on successful implementation that made it a highly efficient and profitable concept for advertisers and search engines, in particular, through the use of keyword auctions. Up until now, most of the research relies on the simplest game-theoretic models to extract useful results. We extend the most common models to encapsulate an aspect of the system that only recently has begun to draw attention; the effect of competing advertisements on the user's actions and subsequently on the advertisers' campaign efficiency. We present models that take these effects into account while remaining simple enough for us to answer the most basic game-theoretic questions about them such as the presence of equilibria and their efficiency. We also compare our models to the most common model and show their significant advantages. Finally, we discuss a proposed new mechanism that incorporates externalities and evaluate its performance.