Programmatic Advertising experimenting second price auction method for a long period but it has disadvantages. So, publishers are interested in header bidding to increase their ad revenue. This pushes the major ad exchanges to accept the first price auction method. In this method, the winner should pay what exactly they bid, more transparent. Here, I will explain the differences between first price auction vs second price auction.
Programmatic Advertising followed the second price auction method for a long period of time. But, it has many disadvantages [less transparency, complexity, revenue loss for publisher]. It does a favor for the buyers and is less transparent. Because the winner is enough to pay just above the runner’s bid price even if they bid much more than the runner. Publishers don’t know the winning bid price in this method. So, both publishers and advertisers can’t know the exact value of the ad space.
Publishers feel that second price auction method creates revenue loss. So, the header bidding method is accepted by the publishers. The header bidding method allows publishers to offer the ad space to multiple exchanges at once. It helps the publishers to increase their revenue. So, the header bidding method raises in popular.
This pushes the major ad exchanges to change the auction method to first price auction. In this method, the winner should pay the exact bid price to the publisher. So, publisher’s ad revenue has increased in this method and also publishers & advertisers know the value of the ad space. It helps the advertisers to optimize their campaigns.
What is a Second Price Auction?
Let’s imagine, an auction happens for one impression in RTB auction and below three buyers (advertisers) participated in that auction.
Advertiser A bid price $4
Advertiser B bid price $4.5
Advertiser C bid price $4.2
In this auction, advertiser B wins the auction because they bid the most $4.5. But, they do not need to pay $4.5. According to the rules of the second bid auction, buyer A would pay $4.21, one cent above the second-highest bid, instead of the initial $4.5. This Second Price Auction method gives benefits to the Advertiser and reduces the revenue for publishers. Now, most SSPs understand the publisher problem and they have turned to First Price Auction Method.
What is the First Price Auction?
Let’s imagine, an auction happens for one impression in RTB auction, and below three buyers (advertisers) participated in that auction.
Advertiser A bid price $4
Advertiser B bid price $4.5
Advertiser C bid price $4.2
As per the first price auction rule, the winner should pay the exact winning bid price of $4.5 to the publisher. First price auction is never considered the second-highest auction price. This auction method increases the revenue for the publisher and creates a loss for the advertiser.
But, this method is more transparent than the second price auction method. Both publishers and advertisers know the value of the ad space. So, advertisers can optimize their campaigns to get the ad space.
First Price Auction method has some disadvantages. Especially, it over cost the ad space some time. For example, the winning buyer bid for $10 and the second runner bid for $5. In this situation, the winner should pay $10. But, this buyer can win this ad space even if they bid for $6 or $7. So, from the buyer’s point of view, this is a loss. To fix the over-value issue and save the advertiser money, the demand side platforms launch a concept “Bid Shading”. The leading demand side platform Amobee avail this feature to its advertisers. Let’s discuss the Bid Shading Concept in the next article.
Conclusion
Recently, most ad exchanges adopted to first price auction method to increase revenue for publishers. Otherside, advertisers needs to spend more money than second price auction model. In this post, you have red all advantages and disadvantages of both pricing models. Along with that, read about bid shading model that helps the advertisers to cut down some amount of ad spend in the first price auction environment.
