We model an online display advertising environment in which “performance” advertisers can measure the value of individual impressions, whereas “brand” advertisers cannot. If advertiser
values for ad opportunities are positively correlated, second-price auctions for impressions can be very inefficient. Bayesian-optimal auctions are complex, introduce incentives for false-name bidding, and disproportionately allocate low-quality impressions to brand advertisers. We introduce “modified second bid” auctions as the unique auctions that overcome these disadvantages.
When advertiser match values are drawn independently from heavy tailed distributions, a modified second bid auction captures at least 94.8% of the first-best expected value. In that setting and similar ones, the benefits of switching from an ordinary second-price auction to the modified second bid auction may be large, and the cost of defending against shill bidding and adverse selection may be low.