Edelman, Benjamin, and Michael Schwarz. “Optimal Auction Design in a Multi-unit Environment: The Case of Sponsored Search Auctions.” December 2006. Mimeo. (Revised and published as Optimal Auction Design and Equilibrium Selection in Sponsored Search Auctions, American Economic Review 100, no. 2 (May 2010): 597-602.)
We characterize the optimal (revenue maximizing) auction for sponsored search advertising. We show that a search engine’s optimal reserve price is independent of the number of bidders. Using simulations, we consider the changes that result from a search engine’s choice of reserve price and from changes in the number of participating advertisers.