Display Advertising Auctions with Arbitrage∗

Online display advertising exchanges connect web publishers with advertis-ers seeking to place ads. In many cases the advertiser obtains value from an ad impression (a viewing by a user) only if it is clicked, and frequently advertisers prefer to pay contingent on this occurring. But at the same time many publish-ers demand payment independent of click. Arbitragers with good estimates of click-probabilities can resolve this conflict by absorbing the risk and acting as in-termediary, paying the publisher on allocation and being paid only if a click occurs. This paper examines the incentives of advertisers and arbitragers and contributes an efficient mechanism with truthful bidding by the advertisers and truthful re-porting of click predictions by arbitragers as dominant strategies while, given that a hazard rate condition is satisfied, yielding increased revenue to the publisher. We provide empirical evidence based on bid data from Yahoo’s Right Media Exchange suggesting that the mechanism would increase revenue in practice.