Allocation and Price Guarantees in an Uncertain Internet Advertising Market

Buying display ad impressions via auctions in Internet advertising exchanges comes with significant allocation and price uncertainties. In this paper, we consider the problem of designing a contract to mitigate this risk. In particular, we formally study how risk aversion affects the desire for guarantees, and their pricing. We propose to augment the traditional second-price auction with a programmatic purchase option (which we call a Market-Maker contract) that removes both allocation and price uncertainties. It allows advertisers to secure impressions in advance by paying a premium while enjoying allocation and price guarantees. We first prove that the second-price auction remains truthful under the risk-aversion utility models we consider. We then rigorously analyze the equilibrium outcome in the presence of a Market-Maker contract and show that it yields a Pareto improvement in the selleru0027s revenue and in the sum of advertisersu0027 utilities. Finally, through computations based on popular valuation distributions, we illustrate the selleru0027s revenue and advertisersu0027 utilities improvements obtained by adding a Market-Maker contract in display advertising.