Strategic bidder behavior in sponsored search auctions

We examine sponsored search auctions run by Overture (now part of Yahoo!) and Google and present evidence of strategic bidder behavior in these auctions. Between June 15, 2002, and June 14, 2003, we estimate that Overture’s revenue might have been higher if it had been able to prevent this strategic behavior. We present an alternative mechanism that could reduce the amount of strategizing by bidders, raise search engines’ revenues, and increase the efficiency of the market. We conclude by showing that strategic behavior has not disappeared over time; it remains present on both search engines.