The Unavoidable Truth about First-Price Auctions

We’ve already spoken about the different auction types out there, and how they impact on everything we do in programmatic. What was once a technical insiders-only subject has become required reading for everyone in advertising – from brand bosses, to frontline publisher sales teams.

Why? Because wherever you sit, knowing your first-price from your second-price auction will mean you can do better business, and not get fooled by complex-sounding language.

But also – understanding what’s behind the evolution of auctions so far will help you know where programmatic might go next (as well as the wider media and advertising industry).

Science & Human Nature

The science behind the 2nd price auction is solid – PhDs and even a Nobel Prize stand as proof that this approach enables a market to grow. To this day, it’s also how bidding in search advertising also works.

However, unlike the search market, display is one with a high number of exchanges and other ‘point solution’ specialists, all doing their best to carve out their piece of the programmatic pie. And to make it even more complex – not just one Google, but multiple publishers all competing for that same ad revenue.

Scientific proof and evidence is one thing, but as we see in world politics, just as in ad tech in recent times – experts are as nothing in the face of human nature, and short-term goals.

Our technology partner, Rubicon Project has a useful summary of how we got to where we are right now, starting with how header bidding actually involves two sets of auctions:

Here’s how it works: First, each participating exchange conducts an auction as usual among its buyers, and passes the winning bid to the publisher’s header. The header then conducts a second “downstream” auction by comparing the winning bids from the participating exchanges and awarding the impression to the highest overall bidder.

To understand why header bidding affects auction dynamics: if just one of the exchanges in the above example runs a first-price auction, its winning bid will probably be higher than the bids submitted by the others (which are passing through second-price bids). This makes it far more likely that the exchange submitting the first-price bid will be the overall winner downstream. To ensure their competitiveness, the second-price exchanges must move to first-price as well. If they don’t, their buyers will win less and may be less likely to fulfil their campaign objectives.

In 2017, some exchanges – not Rubicon Project – began running first-price auctions without telling their buyers. This is why we publicly announced we would be testing first- price and communicating the auction type to platforms in each bid request. We gave our demand and supply partners plenty of lead time and solicited feedback from them before making changes.

The New Transparency

Put differently, even if we still believe 2nd price auctions need to play a part, competitors using 1st price mean our customers lose out – so our hand is forced – and we must of course also embrace this way of working.

But we won’t just rest there – we will do all we can to mitigate fall out, keeping buyers engaged by bringing SPO to play like via the acquisition of nToggle. Because, though some of our competitors may not consider longer-term market effects, we are firmly invested in buyers’ continued involvement.

And let’s not forget, to start with, that all of this header bidding stuff started as a response to Google’s over-dominance of the market. We believe that Rubicon Project’s technology still presents a viable alternative to the duopoly’s dominance. And in the meantime, in case we’d forgotten, there are many more examples of how tech market dominance can impact our daily lives in negative ways.

Read More

If you’re interested in how Rubicon Project explains header bidding and auctions transparently to buyers, find out more here.

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Daniel Ahlbert