Position Auctions with Budget Constraints: Implications for Advertisers and Publishers

This paper examines position auctions with budget-constrained advertisers, a dominant bidding environment used by publishers to allocate positions in online advertising. Budget constraints play a crucial role in equilibrium bidding by inducing advertisers to strategically deplete a higher-ranked advertiser’s budget to gain in rank. This strategic consideration has consequences for the advertisers’ profits and the publisher’s revenue. An advertiser’s profit can strictly decrease with her budget when competition for an advertising space (e.g., a keyword) is intense. The publisher’s revenue can also strictly decrease when an increase in the higher-ranked advertiser’s budget induces the lower-ranked rival to reduce her bid, due to her inability to deplete the higher-ranked advertiser’s budget. Several managerial implications for advertisers and publishers are discussed.