The Dark Box: Second-Price Auctions
Sources:
https://adexchanger.com/ad-exchange-news/the-dark-arts-of-second-price-auctions/
Ad exchanges usually use “sealed bid second price auction” for auctioning off an ad space on publishers’ websites. In this type of auction, bidders place bids that are the maximum prices that they would be willing to pay without knowing anything about others’ bids. The winner is the one who bids the highest price, and he/she pays the amount bid by the second highest (maybe plus 1 cent), and this price is also known as the clearing price.
In reality, the lack of transparency of second-price auctions opens up the potential for price manipulation by the ad exchanges. A buyer does not know about what exactly goes on between the clearing price and their winning bid. This lack of transparency is also called “black box.” Because of this black box, the ad exchanges can do anything about the clearing price, free to raise it if they wish.
Dynamic floor pricing is the most common technique used to inflate clearing prices. This enables publishers to adjust the minimum price they would accept. Most exchanges do not provide the floor price in their bid request. This protects publishers’ yield but puts buyers in disadvantage because they do not know the minimum amount they can bid. The other strategy is the use of “buyer fees”, which is an extra percentage added to the second-highest bid by the exchange. This means, the exchange can add any amount to the second highest bid as long as the total does not exceed the highest bidder’s bid.
We have learned in class that bidding truthfully is a dominant strategy in a single-item second-price auction. However, in a generalized second-price auction involving publishers, advertisers and multiple ad slots, bidding truthfully is not a dominant strategy. When exchanges could potentially manipulate clearing prices without buyers knowing about it, I think it becomes even more important that the bidders do not bid truthfully. Unfortunately, because bidders do not know if the exchanges will raise the clearing prices and by how much they will raise the prices, it is hard for bidders to decide exactly how much they should bid.