LLM-Auction: Generative Auction towards LLM-Native Advertising

Abstract: The rapid advancement of LLMs necessitates novel monetization strategies, among which LLM-native advertising has emerged as a promising paradigm by naturally integrating advertisement within LLM-generated responses. However, this paradigm fundamentally shifts the auction object from discrete ad slots to the distribution over LLM outputs, posing new challenges for designing auction mechanisms. Existing mechanisms for LLM-native advertising adopt frameworks that decouple auction and generation, which either ignore externalities or require multiple LLM inferences for ad allocation, rendering them impractical for industrial scenarios. To address these challenges, we propose LLM-Auction, which to the best of our knowledge is the first learning-based generative auction mechanism that integrates auction and LLM generation for LLM-native advertising. By formulating the allocation optimization as a preference alignment problem between LLM outputs and the mechanism's objective which reflects both advertisers' expected value and user experience, we introduce Iterative Reward-Preference Optimization (IRPO) algorithm that alternately optimizes the reward model and the LLM. This approach enables the LLM to inherently model allocation externalities without any extra inference cost. We further identify the allocation monotonicity and continuity of LLM-Auction, which allows us to prove that a simple first-price payment rule exhibits favorable incentive properties. Additionally, we design an LLM-as-a-judge simulation environment to facilitate large-scale data construction and enable comprehensive quantitative evaluation of the mechanism's performance. Extensive quantitative and qualitative experiments demonstrate that LLM-Auction significantly outperforms existing baselines in allocation efficiency, while achieving the desired mechanism properties.