Collusion with a rent-seeking agency in sponsored search auctions

We study 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. Despite the specificity of the auction mechanism, we show that an agency can profitably deliver bid delegation services, which increase the advertisers’ surplus and contribute to market efficiency if ad spaces are not too different. The optimal policy of the agency coordinates advertisers on a unique efficient equilibrium, which implies a lower bound on the search engine’s revenue and makes the lowest-valuing member of the coalition indifferent between refraining from participating the auction and defecting the agreement. We also point out that the Vickrey-Clarke- Groves is a compatible solution and is uniquely achieved by bid delegation if side contracts are based on the locally envy-free stability criterion.