Ain’t Google Adwords a miracle o’ modern science? Here’s a system that searches your web page for keywords, hunts for advertisers who wanna have their message displayed next to these keywords and then auctions the advertising space to the highest bidder. All in the twinklin’ of an eye. Adwords is so good that it’s made Google millions or billions or zillions (who’s countin’?)

What can game theory tell us about the future of this digital auction house? According to Sudhir “Secrets” Singh, an electrical engineer at the University of California, Los Angeles and his buddies, game theory suggests that everybody would benefit by the emergence of a new kind of online business that exploits the inefficiencies of the Adwords system.

Here’s the thinkin’. There is a limit to the number of advertising slots on each page and this leaves advertisers a-scramblin and a-scufflin for spaces next to the most popular keywords. Inevitably, the advertisers who miss out are left a-sobbin and a-wimperin at the end of the day. The sobbers and wimperers are perfect fodder for the new businesses.

According to Secrets Singh, these businesses are gonna buy up popular keywords and then resell them to advertisers who want to ensure they don’t miss out on a slot. Secrets and his crew have built a model of this new market and calculated the revenues and payoffs for all parties. The model assumes that this game is a symmetric Nash equilibrium, meaning that everybody plays in the same way (or at least that nobody has anything to gain by unilaterally adopting a different strategy) .

Under these circumstances everybody wins–the auctioneer, the reseller and the bidders.

Ain’t that a bee-yoo-tiful story? So ya’ll gonna see resellers springin up all over the place soon. Secrets Singh and his buddies even have a start up called Ilial.com and there ain’t no prizes for guessing what that’s gonna be doin’.

They’ll already be a-dreamin and a-wondrin about the zillions they gonna make.

I know ya’ll lurv a happy endin. So ya’ll keep quiet about Adwords not being a symmetric Nash equilibrium. Y’hear?

Ref: arxiv.org/abs/0709.0204: Capacity Constraints and the Inevitability of Mediators in Adword Auctions