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Optimal Auction Design in Two-Sided Markets

Abstract:  A key feature of online markets for advertising (e.g., sponsored links) is that clicking rates depend on the searchers’ expectations that the platform selects relevant advertisers. This article studies auction design by a platform that maximizes profits in the long-run, where clicking rates are mechanism dependent. In line with the practice of the major search engines, the revenue-maximizing mechanism is a scoring auction that combines the willingness to pay and the relevance to searchers of advertisers. By trading-off  rent extraction and clicking volume, this mechanism works as a cross-subsidization device between searchers and advertisers.