Keyword Search Advertising and Limited Budgets
Abstract
In keyword search advertising, many advertisers operate on a limited budget. Yet how limited
budgets affect keyword search advertising has not been extensively studied. This paper offers an
analysis of the generalized second-price auction with budget constraints. We find that the budget
constraint may induce advertisers to raise their bids to the highest possible amount for two different
motivations: to accelerate the elimination of the budget-constrained competitor as well as to reduce
their own advertising cost. Thus, in contrast to the current literature, our analysis shows that both
budget-constrained and unconstrained advertisers could bid more than their own valuation. We
further extend the model to consider dynamic bidding and budget-setting decisions.
Keywords: Keyword Search Advertising, Budget Constraint, Generalized Second-Price Auction,
Online Advertising, Competitive Bidding Strategy, Analytical Model.