Optimal keyword bidding in search-based advertising with budget constraint and stochastic ad position

Abstract

This paper analyses the search-based advertising problem from an advertiser’s view point, and proposes optimal bid prices for a set of keywords targeted for the advertising campaign. The advertiser aims to maximise its expected potential revenue given a total budget constraint from a search-based advertising campaign. Optimal bid prices are formulated by considering various characteristics of the keywords such that the expected revenue from a keyword is a function of the ad’s position on the search page, and the ad position is a stochastic function of both the bid price and the competitive landscape for that keyword. We explore this problem analytically and numerically in an effort to generate important managerial insights for campaign setters.

Keywords:

• Internet
• search-based advertising
• pricing
• nonlinear optimisation
• Knapsack problem
• Stochastic models

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

We gratefully acknowledge the support provided by TUBITAK (The Scientific and Technological Research Council of Turkey) grant number 114M037.