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Why first price auction is more favorable than second price auction


In lecture we have discussed a various selection of auctions and among them, the two significant ones are first price auction and second price auction, which are carried out with distinct principles. Bidders in neither auction reveal their truthful values to others. Under first price auctions, the rule is very straightforward, each of the bidders submits their bid to the seller and the person with the highest bid wins and pays his announced value. In second price auction however, it is a little more different, after each of the bidder submits their bids to the seller, while the person with the highest bid still wins the game, he however, only needs to pay the second highest bid. Because of these two different standards, the dominant strategy for bidders is to bid lower than their truthful value in first price auction, and to bid their truthful values in second price auction.

Because of this fact, in the past ad tech companies tend to prefer second price auctions, as it induces buyers to bid their truthful values, maximizing the company’s profits. Recent statistics have shown however, that more and more ad tech companies are inclining to move toward first price auctions. Due to the fact that some “treacherous” bidders, who are willing to take risks, bids ridiculously high values to become the winner of the game, and then cheerfully pays the second highest bid, that is more reasonable and much lower, the second price auction has been exploited as a game in which bidders announce values not based on their truthful values but rather on their willingness to take great risks, which has made the auction no longer fair. In first price auctions however, bidders must assess their truthful values and consider the price they are willing to pay to win the item, therefore, first price auction tends to be more reasonable, which makes it favorable to many ad tech companies.


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