Auction mechanisms for demand-side intermediaries in online advertising exchanges

Motivated by the online advertising exchange marketplace where demand-side intermediaries conduct local upstream auctions and participate in the exchanges' real-time auctions, we study the revenue and efficiency effects of three different auction mechanisms for such intermediaries. Specifically, we consider the widely-used first-price sealed-bid auction and two variations of the Vickrey auction (termed pre- and post-award), in a single-exchange single-item setting. We show that, for a homogeneous population of intermediaries with captive buyers competing at the exchange, the three mechanisms yield different expected profits for the intermediaries and revenue for the exchange, but a complete ranking for all mechanisms cannot be attained. We also demonstrate that the optimal reserve price of the exchange increases with the number of buyers and/or intermediaries, and that the social welfare decreases, compared to classical auctions without intermediaries. Moreover, we show that pre-award Vickrey auctions are less efficient than the other mechanisms. Finally, we compare the two Vickrey variations in a duopoly setting with non-captive buyers, and show that all buyers always select the post-award mechanism.