Frist Price, Higher Price, More Lost.
This article talks about the transition in programmed platforms from second price auctions to first price. There has been a recent switch to first price auctions and as a result ad space purchasers are overpaying by over 54%. Thats huge!
In a second price auctions, the dominant strategy is to bid your true value, because no matter what, you are either going to end up with a positive pay off due to this, or a payoff of 0. Essentially, this always makes you a winner. And if you don’t win, it certainly means you will not lose. However, in the world of programmatic bidding, bidders were bidding on multiple platforms for ad space at once. Suppliers of the space felt they were being taken advantage of – and thus made a change.
The problem with the change is, in first price auctions – your dominant strategy is TBD. If you bid your true value, you may not win. If you bid below, perhaps you don’t win, but if you did you wouldn’t have lost any money, or if you bid a little higher you would have won the item and still underbid. If you bid above, you’re paying that price and you lose in your payoff. The ad suppliers were taking advantage of this and driving the bids higher than true value for most purchases.
What was really interesting about this article, was that I assumed second-price auctions allowed the most transparency to auctions because it supports truthful bidding through reward. The industry, felt this was not the case and opted for first-price auctions. To me, this move seems counterintuitive because it is harder to “play” on either side to feel like you’ve won. I think the results of the general over payment for ad space demonstrates this. Personally, I think both sides would mutually benefit from returning to second-price auctions but perhaps proposing a rule that regulated on how much space you could bid on.
https://www.emarketer.com/content/first-price-auctions-are-driving-up-ad-prices