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DSPs Preference For First Price Auction over Second Price Auction

Article: https://www.martechadvisor.com/articles/ads/to-bid-or-not-to-bid-that-is-the-question-for-dsps/

In the article To Bid or Not to Bid? That Is the Question for DSPs, Friedman points out a phenomenon that programmatic demand-side platforms (DSPs) have moved toward the era of the first-price auction from its long history of a second-price auction. Friedman believes that before, “when several DSPs bid for the same ad opportunity on a relevant programmatic exchange, they all bid slightly higher than what they would actually be willing to pay” because they will end up pay less than their bid in a second-price auction. The key reason for its domination is “to achieve the highest possible yield for publishers (the inventory owners) while keeping the pricing at a realistic level for the budget owners (brands, agencies, and DSPs)” for a reasonable equilibrium. But there are some reasons to drive the industry trying the first price auction. The primary reason is for a greater transparency because when bidder pays their actual bid price, it “eliminating the possibility of any hidden demand-side fees”. Second, publishers can understand the true value of their inventory when the DSPs start biding what they truly willing pay for rather than the fake number they bid to win.

On one hand, this articles pushes me to think about how real life auction is different from what we learned in the class. The dominant strategy for second price auction is in fact to bid the true value but not to bid a little higher as mentioned in the article. The dominant strategy for first price auction is to bid a little lower but not to bid the true value. For sure, not every bidder is playing his dominant strategy in the DSPs industry. The speculation could be that when there are so many bidders in the playground, a bidder is afraid to bid his true value to lose the auction because he predicts some other bidders do not bid their true values; as a result, he ends up giving up his dominant strategy but to bid a little higher. On the other hand, it is very interesting to see how auction type matters and the meaning behind it. For example, people see a “greater transparency” behind the first price auction because how it eliminates the willingness to pay more just to win the auction and thus feeling comfortable to shift to the first price auction.

 

Citation:

Friedman, Freddy. “To Bid or Not to Bid? That Is the Question for DSPs.” MarTech Advisor, 8 Oct. 2018, www.martechadvisor.com/articles/ads/to-bid-or-not-to-bid-that-is-the-question-for-dsps/.

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