Rev Ind Organ (2011) 39:169–185
The Design of Advertising Exchanges
R. Preston McAfee
Published online: 9 June 2011
© Springer Science+Business Media, LLC. 2011
Abstract Internet advertising exchangespossess three characteristics—fast delivery,
low values, and automated systems—that inﬂuence market design. Automated learn-
ing systems induce the winner’s curse when several pricing types compete. Bidders
frequently compete with different data, which induces randomization in equilibrium.
Machine learning causes the value of information to leak across participants. Discrim-
ination may be used to induce efﬁcient exploration, although publishers (websites)
may balk at participating. The creation of “learning accounts,” which divorce pay-
ments from receipts, may be used to internalize learning externalities. Under some
learning mechanisms the learning account eventually shows a surplus. The solution is
Keywords Auctions · Winner’s curse · Machine learning · Display advertising ·
The tools of market design—economics practiced as an engineering discipline—have
seen widespread deployment in the past two decades. A diverse set of applications
include spectrum auctions, physicians’ residencies, search keyword auctions, elec-
tricity auctions, secondary school placement, kidney exchange, and the sale of natural
resources like mineral rights.
The total value of resources that have been directed
using principles of market design has probably topped US$200B at this point in time.
Display advertising—graphical advertisements on web pages—is primarily sold
through contracts negotiated by humans. Increasingly, however, advertisements are
See Abdulkadiroglu et al. (2005), Edelman et al. (2007), McAfee et al. (2010a), McMillan (1994),
Milgrom (2000), Roth et al. (2005), Roth (2010), Tietenberg (2010), Varian (2007), and Wilson (2002).
R. P. McAfee (
Yahoo! Research, 3333 Empire Blvd., Burbank, CA 91504, USA