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Programmatic Advertising is Preparing for the First-Price Auction Era

Advertisements are almost everywhere on the internet. Especially in this day and age, ads can be found all over social media. If you browse Facebook, ads can be found just on the right of your news feed as you browse down to find out what everyone else is up to. Even if you don’t browse a form of social media, search engines such as google have ad space. In class, we have discussed how ad space is bought and sold, which is usually through a second price auction, where the highest bidder would pay the price that is bid by the second highest bidder for the ad space. In this case, the optimal strategy would be to bid the true value for the ad space which would give non-negative payoffs. If you happen to pay less than your true value, you would have a positive payoff. Even if you happened to pay your true value if the top bids were the same, you would still not be losing anything. Despite this, some are changing the ways ad space is auctioned off, suggesting that a first price auction may be better.

The article details some of the flaws of the current system of buying  ad space. The main criticism of second price auctions for ad space is that there is a lack of transparency, meaning that some supply-side platforms mislabel their auctions as second-price auctions or they raise the price floor of the auction without knowledge of the bidders themselves. In the end, these types of ad spaces end up being just as expensive as first price auctions for the buyers. Therefore, there a number of exchanges that have started using first price auctions for ad spaces in conjunction with second price auctions to assist buyers of ad space. These exchanges include OpenX, Index Exchange, and Rubicon. First price auctions might be the solution due to the severe competition in pre-bidding, or where bidders bid on multiple ad spaces prior to actually selling the space which increases ad revenue for the seller.

There are also a number of concerns that first price auctions may bring. The article discusses several issues with the usage of first price auction. For example, it may result in incentives for buyers to bid less as they have to pay their own bid rather than the second highest, which could potentially be much lower than theirs. This would result in less ad revenue for supply-side platforms and publishers. They also discuss the issue of slowing down inventory movement which could be detrimental to the ad industry which is heavily reliant on not having leftover ad space. In the end, the article concludes that for the most part, it doesn’t really matter which type of auction used, but rather that the information provided to the buyer is correct and that sellers of ad space are transparent in their actions while selling their space.

This article details some useful information in the context of the class. While we understand that the majority of ad space is bought through second price auctions (discussed in class), our strategies may start to change due to the lack of transparency. If sellers of ad space start to adopt some of the practices that are discussed in this article such as price floors or usage of different auctions without buyers knowing, the dominant strategy of buying ad space may change. For example, having a price floor that is unknown to the buyers prior may turn the auction into an auction that is basically a first price auction (the seller could set the floor as the same as the highest bid). In this case, we would take the dominant strategy of a first price auction and bid a value under the true value. Similarly, since some exchanges are starting to adopt first price auctions, it may be useful to then discuss the new dominant strategy which was previous described. Of course since there isn’t perfect transparency between buyers and sellers currently, we would never really know what the seller is truly planning and thus as the article stated, establishing better transparency between buyers and sellers would be the best course of action to ensure both groups benefit in some way.

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Programmatic advertising is preparing for the first-price auction era

 

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