Effect of Switch from Second to First Price Auctions
The popularity of second price auctions is because the dominant strategy for the buyer is to bid their true value. The winner of the auction pays less than their value, therefore making a profit. In first price auctions, buyers’ dominant strategy is to pay less than their value; if the winner bet his true value, he is rewarded a net profit of 0. The second price auction removes a layer of complication from bidding because buyers don’t have to calculate how much they should put down, depending on the number of participants, if they know bidding their true value will make them profit over the long run.
Programmatic advertisers have had to adapt rapidly to the recent switch of most supply-side platforms from second to first price auctions. Many buyers did not appreciate that they were suddenly paying higher rates for an ad placement. A result of this shift was the advent of bid shading, which reduces the price the buyer must pay for the amount they bid. The compromise still profits the buyer who bids their true value, however by a lesser margin than in second price auctions.
Works Cited
https://www.emarketer.com/content/how-bid-shading-is-changing-programmatic-auctions-4