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InMobi- Ideal Mechanism for Auctions of

Auctions (Term VI)

Submitted to
Professor Sreelata Jonnalagedda
Indian Institute of Management, Bangalore
For
Related Auctions Study in
Post Graduate Diploma in Management Program 2014-16
On
February 28, 2016

.
Names and Roll numbers of the Students
Anand Krishnan

Sambit Rath

1411278

1411262

PGP 2014-16

PGP 2014-16

Contents
Introduction .................................................................................................................................................. 3
Research Objective ....................................................................................................................................... 3
Need for Experimentation ............................................................................................................................ 3
Methodology................................................................................................................................................. 5
Experiment Set Up ........................................................................................................................................ 5
Conclusion ..................................................................................................................................................... 9
Appendix ..................................................................................................................................................... 10
References .................................................................................................................................................. 10

Introduction
The science of Auctions have been well researched (Krishna, V, 2009) through the ages(Auction
Theory) and there is rich scholarly literature around it, in this contemporary concerns study we
are focusing on an extension of Auction Theory that hasnt received enough attention yet,
Auction of auctions. This is quite a niche field since the range of applications of this field is quite
narrow. Interestingly this topic is having a resurgence in the mobile advertisement space. This is
why IIMB in collaboration with InMobi1, a mobile advertising & discovery platform, is
conducting a study on understanding the auction dynamics when multiple stages of auctions
are combined with multiple agents having independent goals.

Research Objective
This CCS intends to create an Auction Experiment Model that InMobi can run in its internal
auctions in both live cases & using historical data to identify optimal conditions to be set in
their auction models. This study aims at identifying the key parameters InMobi should be
focusing on while creating a multi-staged auction model. The experiment model will identify
the key controlled, independent & measurement (dependent) variables and provide a
methodology to study the causality of dependence.

Need for Experimentation


The need for creating this experimentation has stemmed from the auction conditions at InMobi
& the requirement to optimize the auction methodology at InMobi going forward. At InMobi,
the auction for advertisement space is set at three levels; Advertisement Exchange (AdEx),
Advertisement Pools (advertisement networks) & Buyers. These entities perform two levels of
auctions, one at the adex level & another at the adpool level; both the auctions are done
internally within InMobi. The buyers are external agents (advertisement agencies) with ad
content to distribute. The adpool is a group of such buyers segregated on the basis of content
type, customer type and business units. The auction at the adpool level is on a contingent good,
the contingent good being the ad space contingent on the fact that the adpool wins the auction
at the central ad exchange. The layout on how the auctions are structured is can be seen below,

http://www.inmobi.com/company/

The complexity of such a model has led to InModi needing contemporary research on
understanding how this model can be optimized from an auctioneer point of view and avoid
system inefficiencies such as double marginalization(Dellarocas, C, 2012) etc. This has created a
need to extend existing research on auction of auctions with experimental to understand the
system better.
This study has identified a research paper Auctions with Intermediaries by Feldman Et
al(Feldman Et al , 2010) to lay the basis of this research. Feldmans research via mathematical
model studies about the ad auctions in the market place. The paper considers a setting where
buyers (advertisers) of a unique and indivisible good (advertisements) try to buy the same from
a central seller (Ad Publishers). This is model is very similar to the model at InMobi; this team
has created an interpretation document of this material for further understanding in Exhibit A.
The mathematically proven theorems presented in the paper are:
[1] Theorem 1: Intermediaries use posted (take it or leave it) prices in their internal auctions as
a dominant strategy in the case of a single buyer.
[2] Theorem 2: Intermediaries set the optimum posted price for their internal auctions
randomizing a value from the range [vr , r]. They are indifferent about the actual value as
long as it falls in the interval.
[3] Theorem 3: Posits about the effect of changes in r & n on [vr , r].
[4] Theorem 4: The optimum reserve price for Central Seller is inversely proportional to the
number of intermediaries.
[5] Theorem 5: The centers optimum price will always be greater than zero, no matter the no:
of intermediaries.

The primary limitation of this paper is that all the five theorems mentioned are proved using
mathematical models with a basic assumption of only 1 buyer per adpool. Theorem 6
speculates about the possibility of extending these theorems to a case having multiple buyers
as in real life InMobi never have a situation with only one buyer per adpool. Hence, we can infer
about the validity of these theorems in a multi-buyer scenario using experimentation
methodology.

Methodology
The first task is to identify which all theorems actually are valid in a multi-buyer scenario. This
lead as to discounting theorems 1,2 & 3. This is because the first 3 theorems are about the
posted (take it or leave it) price that is implemented at the adpool level. This becomes
irrelevant since a posted price methodology will not work in a multi-user scenario where an
actual auction has to take place and a posted price will restrict the participation of buyers as
well as not meet the optimum conditions for the auctioneers.
Hence we will be concentrating on the theorems 4 & 5 which speak about the reserve price at
the adex central auction.
This study will create an experiment setup drawing from secondary research on
experimentation such as Marketing research: An applied orientation by Malhotra, N.K
(Malhotra, N.K, 2008), (Baird, D.C, 1962, Experimentation: an introduction to measurement
theory and experiment design) etc

Experiment Set Up
The aim of this experiment is to identify how auctioneers & buyers will behave when there are
multiple buyers present in a scenario with intermediary auctions. The experiment plans to
identify concomitant variation while reducing the effect of other possible causal factors. The
overall structure of the auction is as indicated below;
There are two levels of auctions in this experiment setup, Level 0 is at the Advertisement
network level which aggregates j buyers in each network. Level 1 is at the Ad Exchange level
where a group of n ad networks bid for the central ad inventory for their respective winning
buyers.
The auction setting would involve at the center an ad exchange which is a auctioning off an
indivisible & unique ad inventory to a set of ad networks. The auctioneers themselves have no

value for the inventory whereas each of the buyers has their own private value for the
inventory. The private values of the inventory for the buyers are assumed to be uniformly
distributed in a range of [0, 1]. The bidders are not aware of the private values of other bidders.
The auction at the intermediary (ad n/w) is on the contingent good of the ad n/w themselves
being able to win the subsequent auction, if not the win at a network level is meaningless. A
second-priced auction format will be conducted at both the exchange and network level. The
center will design an auction with a reserve price r.
As part of the experiment, we shall infer about the variation in the reserve price r with the
changing parameters within the auction setup. To summarize the auction conditions:
1. Indivisible & unique good at the center.
2. j buyers per ad n/w, can be chosen based on available independent buyers in InMobi.
3. n ad networks in the centers auction can be chosen based on available ad pool in
InMobi.
4. Buyers have their own private value for the inventory with its distribution over [0, 1].
5. Second-priced auctions at central & ad pool level.
6. Central auction is run with a reserve price r
As part of the experiment, InMobi will have to keep the auction conditions same across
experiment trials and only tweak parameters that are mentioned in the experiment.

Proposition 1 The optimum reserve price for Central Seller is inversely proportional to the
number of intermediaries.
The purpose of this experiment is to identify the effect of the number of intermediaries on the
optimum reserve price of the seller. There is currently no mechanism/mathematical model to
predict the optimum reserve price for a central auction with multiple buyers at level 0. Hence
InMobi will have to identify the optimum reserve price through multiple rounds of auctions for
a chosen set of condition as mentioned in the experiment setup.
Step 1: The experiment should be repeated multiple times by changing only the reserve price in
the central auction and through trial & error the optimum reserve price for maximum revenue
can be identified.
The next step is to identify the effect of the number of intermediaries n in the reserve price.
This includes changing the value of n to n+/- and re-executing Step 1 to find optimum reserve
price. Using this experiment we can identify the relationship of n to reserve price.

Experimental Variable Setup


Controlled Variable

Number of buyers j

Independent
Dependent

Number of ad n/w n
Profit at the centre

Buyers Private value


Distribution function
F
Where F(0,1)
Reserve Price

Steps of Experiment:
1) Finding the optimum reserve price
a) Select a number of intermediaries, say n=3
b) Change the reserve price and find the profit
c) Repeat steps (a) and (b) multiple times to find the reserve price at which maximum profit
exists i.e. the optimum reserve price. Let the Optimum Reserve price be Z.
Treatments:
2) Increase the number of intermediaries to 4, find optimum reserve price by repeating Step 1,
but with n=4. Let it be X.
3) Decrease the number of intermediaries to 2, find optimum reserve price by repeating Step 1,
but with n=2. Let it be Y.
Expected Result: According to our Proposition, X should be less than Z and Y should be greater
than Z.

Proposition 2 The centers optimum price will always be greater than zero, no matter the
no: of intermediaries.
This proposition, is about understanding whether any scenarios exist in which a zero reserve
price at the central auction is advisable. Theorem 5 proves that reserve price should always be
positive no matter how big the number of intermediaries.
This theorem would also depend upon the results of the experimentation in Proposition #4, if
we can prove that the relationship is one of inverse nature then the reserve price should
disappear at large no: of intermediaries. It would not be pragmatic to break down the ad pools
to create an extremely large number of smaller ad pools. In reality the ad pool size of Inmobi is
not going to be that high.

InMobi can identify a maximum no: of ad networks they can have in an auction of such nature
and then adding a certain level of perform Step1 in Proposition #4 to figure out the optimum
reserve price. Using this we can postulate on the reserve price of a reasonably sized ad n/w
auction.
Experimental Variable Setup
Controlled Variable
Independent
Dependent

Number of buyers j
Number of ad n/w n
Reserve Price

Profit at the centre

This proposition depends on the results of previous proposition, which states that the The
optimum reserve price for Central Seller is inversely proportional to the number of
intermediaries.
So there are 3 result cases for the Proposition #1 i.e. the results obtained from the experiment
i)
ii)
iii)

The optimum reserve price for Central Seller has no relation to the number of
intermediaries.
The optimum reserve price for Central Seller is directly proportional to the number
of intermediaries.
The optimum reserve price for Central Seller is inversely proportional to the number
of intermediaries.

We consider the third case for our experimentation (iii) because the current theorem doesnt
hold if first two results are obtained. This is because the current proposition tries to prove that
on increasing the number of intermediaries, the optimum reserve price decreases to zero. We
can consider case where optimum reserve price decreases with increase in number of
intermediaries.
The number of intermediaries should be decided by InMobi based on the maximum number of
ad-pools and clients that they think they can have. Let that number be .

Steps of Experiment:
1) Finding the optimum reserve price
a) Select a reasonably large number of intermediaries, say n.
b) Change the reserve price and find the profit

c) Repeat steps (a) and (b) multiple times to find the reserve price at which maximum profit
exists i.e. the optimum reserve price. Let the Optimum Reserve price be Z.
2) Increase the number of intermediaries to a high number, i.e. 45, find optimum reserve price
by repeating Step 1, Let it be X.

Expected Result: According to our Proposition, Z should not be 0.

Conclusion
As part of this CCS this team aimed to learn about the contemporary auction mechanisms in the
mobile advertisement space & contribute in a meaningful manner in its advancement. Through
interviews with InMobi & guidance from the professor we have been able to gain significant
insight in the auction methodology employed in InMobi. Through the experiments, we hope to
have given a platform for InMobi to build a standardized auction methodology that maximizes
benefits for all players. We thank Prof. Sreelata Jonnalagedda & InMobi for the opportunity.
Thank you.

Appendix

Auctions with
Intermediaries - FeldMan Et Al.pptx

Exhibit 1

References
[1] Feldman, J., Mirrokni, V., Muthukrishnan, S. and Pai, M.M., 2010, June. Auctions with
intermediaries. In Proceedings of the 11th ACM conference on Electronic commerce (pp. 2332). ACM.
[2] Kirchkamp, O. and Moldovanu, B., 2004. An experimental analysis of auctions with
interdependent valuations. Games and Economic Behavior, 48(1), pp.54-85.
[3] Krishna, V., 2009. Auction theory. Academic press.
[4] Dellarocas, C., 2012. Double marginalization in performance-based advertising: Implications
and solutions. Management Science, 58(6), pp.1178-1195.
[5] Baird, D.C., 1962. Experimentation: an introduction to measurement theory and experiment
design. Prentice Hall.
[6] Malhotra, N.K., 2008. Marketing research: An applied orientation, 5/e. Pearson Education
India.