Auction dynamics are shaking up the programmatic industry as first-price bidding becomes the norm.
Up to now, real-time bidding auctions have been conducted as second-price, in which the highest bidder paid $0.01 more than the second highest bid set by the publisher. A recent MediaMath Whitepaper highlights the increasing shift to auctions occupying a first-price playing field, where the winner pays exactly the amount they bid.
There are two primary reasons why first-price auctions are favoured:
1. Buyers’ increasing demand for fee transparency and justification.
First-price auctions do away with the bid algorithm push and pull between the DSP platforms and supply-side platforms (SSPs) - one working for the lowest price possible, the other for the highest price possible.
2. The rise of header bidding and competitive pressure among SSPs.
Buyers have historically had little control over, or transparency into, the changes occurring. First-price auctions are seen as a more trustworthy, buy-side-friendly solution that can benefit both sides of the transaction because they prevent hidden fees.
The MediaMath Whitepaper emphasises that when exchanges moved publishers over to a first-price model gradually, impact on price and performance were negligible. They attributed this to the fact that exchanges were clearing close to the bid price before the industry began shifting to transparent first-price auctions in any event. The only exception is in bid numbers higher than $50.
Acquire Online’s Zane Furtado agreed, saying, “Intelligently applied SSP bid shading* has been shown to save up to 25% in costs without sacrificing win rate.”
The move to first-price auctions is likely to cause a short-term disruption, with a longer-term move towards a more sustainable and transparent media playing field.
“The industry will likely be in a transition period for much of 2018 as DSPs adjust algorithms to allow for some bid shading to minimise the chance of overpaying in their auctions,” said Furtado. “First-price auctions will ultimately bring DSPs greater supply chain transparency and allow them to optimise supply paths without SSP auction dynamics tipping the scale.”
*Bid shading involves placing a bid that is below what the full value of an impression may be worth, but still high enough to have a chance of winning the auction, to avoid overpaying.