Automated Internet Ad Auction Pricing
https://www.emarketer.com/content/first-price-auctions-are-driving-up-ad-prices
This article discusses a recent shift in how internet ad auctions are being conducted, and its implications for ad buyers. Whenever a user loads a web page with ads on it, the website conducts a quick auction of the ad positions on the page to Demand Side Platforms (DSP) where the highest bidder gets the ad real estate on the page. This has traditionally been conducted as a second price auction, where the highest bidder pays the second highest price. Now, in the past each ad position has typically been auctioned by a single supply side platform (SSP). However, a new technology called header bidding has allowed these auctions to be conducted much more efficiently without additional wait time for the end user. Now, ad positions are first auctioned by the header of the user’s browser to different competing SSPs vying for the right to sell the ad, and then the winning SSP in turn auctions the ad position off to DSPs.
This change takes a lot of power away from the SSPs. When SSPs had unique control over particular ad positions, network exchange theory would suggest that SSPs receive most of the surplus from each auctioned ad. However, the rapid proliferation of header bidding has caused the profit margins for SSPs to evaporate. As a result, many turned to shady business practices to avoid eating a loss. Essentially, many SSPs began to raise their price floors after all bids came in to values just barely below the highest bidder. For example, suppose 3 DSPs placed bids of 8, 14, and 20 on an ad position. In a normal second price auction, the third bidder would win, and pay 14. However, in these auctions the price floor would get set to 95% of the top bid, cheating the DSP out of a potential surplus. This issue is challenging to solve because only the SSP sees all of the bids. As a result, the winning DSP in this example wouldn’t know whether someone else had bid 19 or the SSP had deceived them. This became a massive problem in automated ad markets- in March 2018 a whopping 23% of ad impressions were sold in this kind of deceptive auction. As a result, many vendors have shifted to first price auctions, since these are more transparent in nature. However, that transparency has come at a cost- ads sold in first price auctions are being sold for 59% more than those in second price auctions. This suggests that DSPs may not be bidding optimally on first price auctions. As a result of these price increases, ad buyers are calling on increased transparency in ad buying, like allowing DSPs to the see the bids of other DSPs after auctions.
Note that while this blog post primarily discusses the above article, some requisite background information comes from here: