Theory of Bidding Strategy in AdWords and Yahoo Sponsored Search
Michael Schwarz recently gave a Google Tech Talk on the bidding systems used by Google AdWords, Yahoo Sponsored Search, and other PPC programs that utilize “Generalized Second Price” (GSP) auctions. The presentation provides a very interesting analysis of bidding strategies and stability of the GSP system, comparing it to others that in some cases are less effective (first price auctions) and one that is “ideal” (Vickrey-Clarke-Groves).
Despite the technical and historical interest of the presentation, it does not provide significant new insights into PPC bidding strategies for two primary reasons. First, it neglects to account for some external influencers of bidder behavior. Second, the conclusions that the theory reaches about the ideal bidding strategy assume that advertisers know what amounts to a break-even value for ad clicks, which is difficult to determine for most companies.
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