Let’s talk about auctions and auction models in programmatic advertising. How are the winners decided, since the programmatic buying model is predicated on real-time bidding? How much does the highest bidder actually have to pay?
Programmatic auctions are of two types – first price and second price. The kind of auction used is decided usually by the supply-side platform (SSP) but sometimes by ad exchange.
Understanding The Two Main Types of Auctions: First Price and Second Price
In both first price and second price auctions, multiple bidders participate by sending in their bid prices and the highest bid wins. The difference between the two is how much the winning bidder has to pay.
In a first price auction, the winning bidder pays an amount equal to its bid price. Basically, the highest bidder will pay exactly what they bid. And in a second price auction, the winning bidder pays an amount that’s one cent more than the bid price of the second highest bidder.
These auction types occur regardless of how the type of programmatic buying that is in place on the demand side. Both open auctions and more private auctions like programmatic preferred deals can operate on either a first price or second price basis.
Benefits of First Price Programmatic Auctions for Publishers and Advertisers
Second price auctions were more common in the in-app ecosystem, but SSPs are now moving to first price auctions, especially as in-app header bidding rises in popularity. Mobile web and desktop moved to first price auctions a while ago.
Publishers and app developers benefit from first price ad auctions, since it essentially removes the price floor created by the second highest bid. But, buyers also benefit from this change, as it provides them with greater transparency over ideal bid prices. In addition, in instances where there are multiple auctions before a winning bid is chosen, having first-price ad mechanisms in place throughout ensures that brands are always in the best position to win the bid every step along the way.
In a world where winning bids at SSPs also go through another auction at the publisher’s end, a winning bid from a second price auction is at a disadvantage compared to the winning bid from a first price auction. Let’s understand this with the help of an example.
In this example second price auction, Bidder 2 is willing to pay a $7 CPM yet loses at the publisher auction because the winning bid is decided by the second highest bid in the SSP auction, which in this hypothetical case was $2.
On the other hand, in the first price auction, the same bidder ends up competing with a $7 bid at the publisher end and wins.
With a first price auction, buyers will see higher win rates as the first-price auction eliminates the risk of being undercut by lower bids from competitors. With first price auctions, no matter where the decision is being made, a bid at the final auction remains equal to the original bid value.
First price auctions also remove unknowns and ensure transparency. Buyers will know what they are going to pay for an impression, without it being affected by competing bids or the auction process at the SSP’s end. Of the two pricing models, first price auctions ensure that both publishers and advertisers are not undercut by a minimum price.
Whiteboard Videos Explaining Auction Models in Programmatic Advertising
Discussion of fixed prices and auction mechanics making your head spin? For a more visual explanation of programmatic auction mechanics, be sure to check out these whiteboard videos on our YouTube channel:
Starting in early 2020, InMobi Exchange elected to more fully embrace first price ad auctions for the vast majority of ad buyers. To learn more about our efforts here, be sure to check out our blog.