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Buyers Perspective: Auction Mechanics

This article covers the different strategies in first and second price auctions. Specifically, how auctions work with sell side platforms (SSP), which allow web developers to optimize their ad revenue and traffic. In any auction, both the buyer and seller are trying to get the highest payoff possible. The article states that sellers in this field have multiple ways of receiving information in order to gain an advantage. Second price auctions are used because the dominant strategy for the bidder is to bid their true value. Once the seller knows your true value, they can take advantage and rework the prices in their favor. Buyers that are aware of the tactics SSP’s use can also strategize, and bid slightly less than their true value. The article states that this is why pure second price auctions do not exist in this field. Uber is currently involved in many lawsuits about mobile advertisements because of the complications and mistrust with SSPs. This is the main reason why first price auctions are being used more frequently in this field. Although first price auctions are simpler and easier to understand, it is more difficult for the bidder to optimize their bid.

In class, we learned about the different types of auctions and the dominant strategy for each one. For a first price auction, it is the dominant to bid slightly less than your true value due to the chance of receiving an above average payoff. Deciding how much less you bid is more complicated, but bidding true value is not optimal. For second price auctions, it is the dominant strategy to bid true value because if you bid above true value, your additional payoff is less than or equal to 0, and if you bid below true value, your payoff would be 0. Additionally, we covered third price auctions where there is no dominant strategy. The web developer SSP and ad revenue field is just one application of auction pricing.

Update 10/16 Lecture: During this class, we went over pay per click ads and how these ads are priced with auctions. Second price auctions work well for one item, but with multiple items, the strategies are more complicated. These types of auctions are advantageous for the seller because knowing true values is very valuable information. This topic relates back to market clearing prices and how ads are distributed.


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