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To Bid or Not To Bid?

https://www.martechadvisor.com/articles/ads/to-bid-or-not-to-bid-that-is-the-question-for-dsps/

In class we’ve discussed first and second-price auctions with regards to dominant strategies. This article discusses DSPs, which are systems that allow ad buyers to manage ad and data exchange through one interface. For the most part in this industry, second-price auctions have been used to decide to sell program advertising. Recently, there has been a shift from second-price auctions to first-price auctions, where instead of the highest bidder paying the second-highest bid price, they now pay their own bid price.

First and second-price auctions have differing bid strategies. Theoretically, second-price auctions work well, since the dominant strategy is to bid one’s truthful value. This is likely a reason why the industry had been using a second-price auction system in the past. Now they are moving towards more first-price auctions, where the dominant strategy is to underbid. Why are they moving away from a truthful bidding strategy? Empirical data may be the reason. According to the article, the second-price auctions in actuality may be causing overbidding, as buyers are willing to pay their truthful value but are also concerned about winning the auction. In a first-price auction, they hope the competitiveness of the auction will compel bidders to now bid and pay their truthful value.

This is an interesting situation because it provides an instance where the game-theory strategies we have been learning may not translate smoothly from theory to practice. There are also other factors which may be affecting bids, such as hidden demand-side fees. While generally knowing the dominant strategies can help with bidding, it is astute to realize that not everyone may use rational decision-making if they do not recognize their dominant strategy. In a second-price auction, it may feel natural to overbid, since it gives the bidder a better chance to win and only overpay slightly (if at all). This could make a first-price auction, where the winner pays what they bid, more suitable for the given industry.

 

 

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