Marketing Agencies and Collusive Bidding in Online Ad Auctions

Authors: Francesco Decarolis, Maris Goldmanis and Antonio Penta

Management Science, Vol. 66, No 10, 4433-4454, November, 2020

The transition of the advertising market from traditional media to the internet has induced a proliferation of marketing agencies specialized in bidding in the auctions that are used to sell ad space on the web. We analyze how collusive bidding can emerge from bid delegation to a common marketing agency and how this can undermine the revenues and allocative efficiency of both the generalized second-price auction (GSP, used by Google, Microsoft Bing, and Yahoo!) and the Vickrey–Clarke–Groves (VCG) mechanism (used by Facebook). We find that despite its well-known susceptibility to collusion, the VCG mechanism outperforms the GSP auction in terms of both revenues and efficiency.

This paper originally appeared as Barcelona School of Economics Working Paper 1088