Co-evolution-based mechanism design for sponsored search advertising

Sponsored search advertising (SSA), the primary revenue source of Web search engine companies, has become the dominant form of online advertising. Search engine companies, such as Google and Baidu, are naturally interested in SSA mechanism design with the aim to improve the overall effectiveness and profitability of SSA ecosystems. Due to model intractability, however, traditional game theory and mechanism design frameworks provide only limited help as to the design and evaluation of practical SSA mechanisms. In this paper, we propose a niche-based co-evolutionary simulation approach, aiming at computationally evaluating SSA auction mechanisms based on advertisers’ equilibrium bidding behavior generated through co-evolution of their bidding strategies. Using this approach, we evaluate and compare key performance measures of several practical SSA auction mechanisms, including the generalized first and second price auction, the Vickrey–Clarke–Groves mechanism, and a novel hybrid mechanism adopted by sogou.com, a major search engine in China.