How second-price auction can create headaches for publishers
A central advantage of a second-price auction, as opposed to a first-price auction, is that it is truthful as rational bidders bid their own, true evaluation of the object. Second-price auction is widely preferred because they encourage buyers to bid the true value that worth to them and end up paying a discount on what they were willing to pay. This can also benefit publishers by giving buyers more incentive to bid higher, ultimately increasing prices. Nevertheless, the recent article claims that the second-price auction can create inefficiencies for publishers in digital advertising because they can’t maximize yield. To overcome this problem, publishers are considering switching to a first-price auction.
The second-price auction is somewhat inefficient for publishers because its auction style can prevent the highest bidder from winning auction, where the second-highest price establishes the clearing price. When bids unpredictably fluctuate, there can be huge gaps between the buyers’ winning bid and the price they actually pay. These gaps reduce the prices and lower the publishers’ potential revenue. Collecting all bids in the second-price auction can potentially increase yield for publishers; however, publishers avoid this due to its complexity. For these many reasons, the second-price auction loses its advantages when implemented so publishers are increasingly ditching in favor of the first-price auction, jeopardizing the trust of both buyers and sellers. Some companies run a few levels of auctioning that combine first-price and second-price models, but many experts believe that the adoption of the first-price auction in digital advertising publishers will escalate in future to increase yield.
How second-price auctioning can create headaches for publishers