Collusion with a rent-seeking agency in sponsored search auctions

We analyse the implications of delegating bids to a bidding agency for the revenues and efficiency of the Generalised Second-Price auction, the standard sales mechanism for allocating online ad space. The agency maximises both its own profits and the advertisers’ surplus and implements collusive agreements by means of side contracts. Our results suggest that an agency can profitably deliver bid delegation services, which increase the advertisers’ surplus and contribute to market efficiency. The agency coordinates advertisers on a unique efficient equilibrium and extracts an optimal fee on the collusive gain that implies a lower bound on the seller’s revenues. We also find that bid delegation uniquely selects the Vickrey-Clarke-Groves outcome if side contracts are based on the locally envy-free stability criterion.