How Good is the Generalized Second-Price Mechanism?

The generalized second-price (GSP) mechanism is the dominant auction format used in online keyword auctions. From the viewpoint of mechanism design, however, the GSP mechanism is not optimal in the sense that it is not incentive compatible and does not result in revenue maximization. This raises important questions of significant practical relevance: How effective is the GSP mechanism? Do better auction mechanisms for keyword advertising exist? This paper aims to offer analytical insights to answer these questions partially. We consider the entire set of linear payment mechanisms and develop a new notion of weak revenue equivalence to compare these linear mechanisms. Our key result indicates that the GSP mechanism can achieve the best performance within the linear mechanism space and suggests that more complex non-linear mechanisms are needed if search engines want to further increase their revenue