Keyword Search Advertising and Limited Budgets

In keyword search advertising, many advertisers operate on a limited budget. Yet how limited budgets affect keyword search advertising has not been extensively studied. This paper offers an analysis of the generalized second-price auction with budget constraints. We find that the budget constraint may induce advertisers to raise their bids to the highest possible amount for two different reasons, i.e., to accelerate the elimination of the budget-constrained competitor, and to reduce their own advertising cost. Thus, in contrast to the current literature, our analysis shows that both budget-constrained and unconstrained advertisers could bid more than their own valuation. We further extend the model to consider dynamic bidding and budget-setting decisions.