Bid-Limited Targeting

This paper 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 different 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, using this mechanism results in higher revenue than allowing bidders to condition their bids on the targeting information in an arbitrary way and also almost always results in higher revenue than not allowing bidders to target. Choosing the optimal cap on the ratio between the maximum bid and the minimum bid 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.