Marketing Papers

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Technical Report

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Publication Source

Operations Research





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We study optimal bidding strategies for advertisers in sponsored search auctions. In general, these auctions are run as variants of second-price auctions but have been shown to be incentive incompatible. Thus, advertisers have to be strategic about bidding. Uncertainty in the decision-making environment, budget constraints, and the presence of a large portfolio of keywords makes the bid optimization problem nontrivial. We present an analytical model to compute the optimal bids for keywords in an advertiser's portfolio. To validate our approach, we estimate the parameters of the model using data from an advertiser's sponsored search campaign and use the bids proposed by the model in a field experiment. The results of the field implementation show that the proposed bidding technique is very effective in practice. We extend our model to account for interactions between keywords, in the form of positive spillovers from generic keywords into branded keywords. The spillovers are estimated using a dynamic linear model framework and are used to jointly optimize the bids of the keywords using an approximate dynamic programming approach. Accounting for the interaction between keywords leads to an additional improvement in the campaign performance.

Copyright/Permission Statement

Originally published in Operations Research © 2013 Operations Research

This is a pre-publication version. The final version is available at


sponsored search, search engine marketing, bid optimization, stochastic optimization, stochastic modeling



Date Posted: 15 June 2018

This document has been peer reviewed.