Penalized Second Price: A New Pricing Algorithm for Advertising in Search Engines

Strategic bidding coupled with the GSP pricing mechanism is known to lead to aggressive bidding behaviour and Competitor Busting in keyword auctions. We introduce a new pricing mechanism, named Penalized Second Pricing (PSP), to help reducing the unfair effects of aggressive bidding.The performances of GSP and PSP are evaluated both in a static and a dynamic context, where the number of bidders may change during the auction. The simulation experiments show that PSP not only discourages aggressive bidding behaviour, but also leads to larger revenues for the auctioneer than those obtained with GSP.