Revenue-Maximizing Auctions: A Bidder’s Standpoint

Abstract

A vast part of the Internet economy is powered by advertising, much of which is sold at auction. A key question for sellers is how to optimize the auction mechanism they use. Bidders, conversely, try to optimize their bidding strategy. Incentive compatible auctions are a sweet spot: theory predicts that it is in the bidders' interest to bid their values, making it relatively easy for them to bid optimally. However, as they learn bidders' value distributions, sellers can progressively optimize their mechanism and extract more revenue from bidders. We show that, in sharp contrast with most results in the academic literature, bidders should not be bidding their value in incentive compatible auctions when there is no commitment from the seller about using a fixed auction. We provide a mix of theoretical and numerical results and practical methods that can easily be deployed in practice.