The Power of First-Price Auctions

Any rapidly evolving, rapidly innovating industry comes with plenty of room for debate. Questions stir around what emerging technology is worth pursuing, which practices have become outdated, how to differentiate between truly innovative advances and passing fads — particularly in the world of programmatic. At present, one of the most hotly contested topics is on the difference between first-price and second-price auctions.

To start, it’s important we explain what both of these terms mean. First-price auctions refer to a model wherein the buyer pays exactly the price they’ve bid on any given advertising impression (which, as a result, maximises revenue potential for publishers). Conversely, second-price auctions refer to a model wherein the buyer pays £0.01 more than the second highest bid for an ad impression.

To paint a fuller picture, let’s walk through what this auction looks like in a bit more detail. Since the advent of header bidding, the average auction involves a near-endless number of bidders. But for example’s sake, let’s imagine that there are just two bidders participating. Buyer One bids £2 for an impression, and Buyer Two bids £3. In either scenario, Buyer Two will, of course, win the impression; the difference comes in the clearing price. A first-price auction would mean that Buyer Two spends the full £3 they had intended to, while a second-price auction would involve Buyer Two paying £2.01 for that impression.

Historically, second-price auctions were the programmatic community’s go-to method. They were simply easier to navigate in a waterfall environment, before multiple platforms had the opportunity to bid on inventory in tandem (and in real-time). Then header bidding flipped this system on, well, its head — allowing buyers to see and assess greater amounts of inventory at once. And when header bidding transformed this system, the auction dynamics had to transform with it.

On the heels of this transformation, first-price auctions became much more popular throughout the industry — and, subsequently, much more widely adopted — largely because of the clarity they created for buyers and sellers alike.

From the buy-side, first-price auctions allow buyers to express their true intent by offering exactly what they are willing to pay for an impression, ultimately boosting their win rates and protecting them from hidden fees along the way (as their bid remains the same throughout the auction). Further, because first-price auctions remove the gap between the expressed bid and the clear price, it allows buyers to understand the true market cost of each impression. Buyers can bid up or down to evaluate the effectiveness of each price point towards an audience, allowing them to reach those with the greatest potential impact and payoff.

Looking at first-price auctions from the sell-side, the benefits are monumental. When buyers are bidding fair value, publishers are able to reap the benefits and earn revenue that is reflective of their inventory’s true value. As such, more than two-thirds of publishers surveyed in a recent Digiday report expressed that they had seen revenue boosts since shifting to first-price. They’re not only earning more, they’re also able to accurately assess how much their inventory is worth — something second-price auctions may hinder.

Of course, it should be noted that the shift to first-price auctions has not been entirely frictionless. In a second-price environment, buyers don’t have to worry about over-bidding, because they know their bid will be reduced to market value. Additionally, it’s also not always clear whether or not an exchange partner is operating in a first or second-price setting, which can make it challenging for buyers to accurately assess the value of any given piece of inventory. The above concerns have partially halted adoption, and understandably so.

That said, we feel strongly that first-price auctions empower every member of our ecosystem, boosting publishers’ revenue opportunities while simultaneously putting control back in buyers’ hands (and encouraging a bit of healthy competition along the way). In the fast-paced world of header bidding, it is the key to maximising profit and purpose on both the buy and sell sides of our industry.

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About Index Exchange: Index Exchange is a global advertising marketplace where premium digital media companies sell their ad impressions openly and in real-time. Built on the pillars of neutrality, openness, and the most reliable technology, Index is the ad exchange that media companies trust. With no other business interests to divide its attention, Index’s sole focus remains connecting media companies with premium demand at massive scale. Visit Index Exchange at https://uk.indexexchange.com/ or @indexexchange.