Optimizing Reserve Prices in Display Advertising Auctions

This paper examines how a publisher should set reserve prices for real-time bidding (RTB) auctions when selling display advertising impressions through ad exchanges, a $595 billion and growing market. Conducting a field experiment to induce exogenous variation in reserve prices at a major publisher, we find that setting reserve prices increases the publisher’s revenues by 35% compared to using a zero reserve price. We also find empirical evidence that advertisers face a minimum impression constraint to ensure sufficient advertising reach. Based on this insight, we develop a structural model of advertiser bidding behavior that incorporates impression constraints, allowing us to infer overall demand for advertising as a function of reserve prices. We then use this demand model to solve the publisher’s pricing problem. Accounting for minimum impression constraints in setting reserve prices yields a profit increase of 9 percentage points over a solution that does not incorporate the constraint. In a final field experiment, we validate our model’s predictions by showing that ad revenues tend to be highest near the model-predicted optimal reserve prices.