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A transition to first price auctions in programmatic advertising

Programmatic advertising is preparing for the first-price auction era

Programmatic advertisement and auction bidding are closely related topics. In order to increase yield, a system called “header bidding” has been implemented by people who make websites. These websites allow multiple advertisers to “bid” on advertisement spots on the website, before the website maker chooses an ad. This system of allowing multiple bids is supposed to increase yield for the publisher, and thereby creates an “auction” system for advertisers looking to market their products.

The article above summarizes the transition of programmatic advertisement from a second price towards a first price auction system. Second price auction systems are typically favored because in this, the buyer’s dominant strategy, as discussed in class, is to bid their true value. This is intended to provide transparency, as the buyer will not have to pay their true price, but rather the price of the next highest bidder, if they win. However, publishers have been doing sneaky things like misrepresenting the type of header bidding auction, and also setting price floors up at the last minute. Both of these actions essentially can create a first price auction kind of scenario for the buyers. Because of that, this article discusses making these header bidding sessions actually first price bid auctions. The buyers in these cases will still have to pay the amount they bid, but their dominant strategy will now be to bid slightly lower than their actual values. This can be beneficial to the buyers, as the article discusses, as it’s better for them to shade their bids slightly lower in a true first price auction than to be blindsided by a “”second price auction.””

However, switching entirely over to first price auctions can create a sort of logistical issue for publishers, so companies such as OpenX, Index Exchange and Rubicon Project, have all just been experimenting with first price auctions alongside second price ones, just to test the waters. The results are still a bit unclear, however, what they have concluded is important is that the buyers know exactly what sort of auction they should expect.

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