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Switch to first-price auctions causing buyers to pay more, call to replace with redesigned second-price auction model

In this article, the author discusses that a recent switch from second-price auctions to first-price auctions that has recently been implemented by a lot of different groups is causing buyers to pay more for advertisements than they previously were significantly. This not a small increase in price either, but rather it has found that this can drive up the prices of CPM ( cost per mille,  a marketing term used to denote the price of 1,000 advertisement impressions on one webpage) by 50%. 

Based on what we learned in class regarding first and second price auctions, this makes sense.  If there is a switch from second to first price auctions, the price of the highest bid will be paid for the ad as opposed to the second highest bid. Although everyone will still bid their true value, the case in which one bids their true value and then ends up paying less than what they bid does not happen anymore, so then in theory the price at which buyers pay will increase.

In response to this, the Omnicom agency, a marketing and communications group, wants to create a new model of second-price auctions different from the old second-price model, which had issues regarding transparency.The goal of this agency is to create a clean and authentic second-price auction system in order to remove fraud and decrease the premiums that marketers pay. This system of second price auctions would has to meet the condition that the people running the auctions are not artificially boosting the price.

This is very relevant to our coursework as it discusses the advantages and disadvantages of a second-price vs a first-price auction. This article exemplifies that although second-price auctions are often better for the buyer, they come with issues such as artificial price inflation and less transparency and need to be re designed in order to be as efficient and trustworthy methods for ad purchasing as possible

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October 2018