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The Shadow Behind the Auction

The second-price auction became the fundamental method for programmatic media-buying marketplace, which was best known as the strategy adopted by eBay. It prevented bidders from overpaying in a bogus auction war where a bidder kept raising prices for the interest of the publisher. According to the article “Who’s On First, What’s Going On With Second: Beware The ‘Shadow’ Auction” by joe Mandese on MediaPost, the team at digital audience exchange OpenX found that some second-price auctions acted in a way more like first-price auctions. In other words, the winning bidder no longer pays the second-highest price, instead paying a price close to his or her own bid.

For a second-price auction, the highest bidder pays the bid of the second-highest bidder, and bidding the bidder’s true value is the dominant strategy, as either bidding higher or lower doesn’t make the payoff better. When it comes to a first-price auction, the highest bidder pays exactly the price he or she bids.

The team of OpenX detected that some of the exchanges were effectively making their algorithms to avoid “second-price auction”, which was the basis of programmatic market bidding, to increase their interests. The team reports that recent changes in the industry, such as header bidding, exposed buyers actual highest price, enabling some exchanges to change their algorithms to set new second-price rules that “clear an auction at 95% (or higher) of a buyer’s first-price bid”. In addition, the team also reveals that the exchanges are using the algorithms specifically on only the highest-priced inventory, which yields the greatest profit to the publisher. As a result, in order to gain more benefits, these publishers alter the game rule, violating the core interest of the bidders, as they bid their true values in order to get positive payoffs, yet gaining less than they could have get. The buyers thought they were participating a second-price auction, but actually were stuck in a first-price auction, ending up paying more than they should have.



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