A Cascade Model for Externalities in Sponsored Search
One of the most important yet insufficiently studied issues in online advertising is the externality effect among ads: the value of an ad impression on a page is affected not just by the location that the ad is placed in, but also by the set of other ads displayed on the page. For instance, a high quality competing ad can detract users from another ad, while a low quality ad could cause the viewer to abandon the page altogether.
In this paper, we propose and analyze a model for externalities in sponsored search ads. Our model is based on the assumption that users will visually scan the list of ads from the top to the bottom. After each ad, they make independent random decisions with ad-specific probabilities on whether to continue scanning. We then generalize the model in two ways: allowing for multiple separate blocks of ads, and allowing click probabilities to explicitly depend on ad positions as well. For the most basic model, we present a polynomial-time incentive-compatible auction mechanism for allocating and pricing ad slots. For the generalizations, we give approximation algorithms for the allocation of ads.
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