Bid-Limited Targeting

Abstract

This article analyzes a mechanism for selling items in auctions in which the auctioneer specifies a cap on the ratio between the maximum and minimum bids that bidders may use in the auctions. Such a mechanism is widely used in online advertising through the caps that companies impose on the minimum and maximum bid multipliers that advertisers may use in targeting. When bidders’ values are independent and identically distributed, this mechanism results in greater revenue than allowing bidders to condition their bids on the targeting information in an arbitrary way and also almost always results in greater revenue than not allowing bidders to target. Choosing the optimal cap on the ratio between the maximum and minimum bids can also be more important than introducing additional competition in the auction. However, if bidders’ values are not identically distributed, pure-strategy equilibria may fail to exist.