Search for a keyword on the web, and at the top or to the right of the list of results you’re likely to see several specially highlighted entries, usually links to relevant businesses, whose “top billing” has been purchased through online auctions. Revenues from such auctions have put Google ahead of ad earnings for any newspaper chain, magazine publisher, or TV network. Buyers benefit financially from the resulting visits to their sites, as well.

But, says Michael Ostrovsky of the Stanford Graduate School of Business faculty, unsophisticated bidders can end up overpaying in the current auction system, and sophisticated players can end up sinking inordinate amounts of time and money into figuring out how to beat the system.

Research by Ostrovsky, assistant professor of economics; Benjamin Edelman, doctoral candidate in economics at Harvard University; and Michael Schwarz, RWFJ Scholar at the University of California, Berkeley, and Faculty Research Fellow at the National Bureau of Economic Research, shows how the current mechanism could be adjusted to create an auction that better serves advertisers—although such an adjustment may not necessarily financially benefit search engines. “At the very least, we want to educate advertisers about the fact that in some sense they are being taken advantage of. Under the current mechanism, if they don’t think carefully about their bidding strategies, they can end up paying a lot more to the search engines than they need to,” Ostrovsky says.

Get the full story at the Stanford Graduate School of Business