Journal of Optimization Theory and Applications

, Volume 152, Issue 1, pp 225–244 | Cite as

Optimal Keyword Bids in Search-Based Advertising with Stochastic Advertisement Positions



US expenditures on search-based advertising exceeded $12 billion in 2010. Advertisers bid for keywords, where bid price determines ad placement, affecting click-through and conversion rates. Advertisers must select keywords, allocating each a proportion of their fixed daily budget. In this paper, we construct a stochastic model for the selection and allocation process. We provide analytical results for the single-keyword problem and examine the multiple-keyword problem numerically. We investigate trade-offs between keywords given varying levels of risk and return. We show the implications of enforcing a probabilistic budget constraint. Our paper provides a critical analysis of the advertiser’s problem that may guide future research.


Search-based advertising Budget optimization Probabilistic models 


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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Susan Cholette
    • 1
  • Özgür Özlük
    • 1
  • Mahmut Parlar
    • 2
  1. 1.San Francisco State UniversitySan FranciscoUSA
  2. 2.DeGroote School of BusinessMcMaster UniversityHamiltonCanada

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