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Switch to First Priced Auctions? Lack of transparency in Second Priced Auctions

In lecture, we talked about how different variations of second priced auctions are used by tech giants like Google, Facebook to auction their advertisement slots. A second price auction (or it’s variation when buyer’s true values are not known and they are bidding for multiple slots at the same time) is a preferable option for all sellers because in ideal conditions, bidding your true value is a dominant strategy in such an auction. This makes the whole process less chaotic than a first priced auction where there is no dominant strategy.

In this article, the writer basically talks about the drawbacks of the second priced auction used today and how major exchanges/SSPs (with the exception of Google AdX) are experimenting/switching to first-priced header bidding auctions. Because these companies are using some variant of the first priced auction, the bidder now pays what they bid—exchanges make it clear to the buyer that they are running a first-price auction. The article says that by sending through the highest bid, the exchange has the best chance of winning against direct buys and Google AdX. There is a trend of exchanges moving to transparent first priced auctions now-a-days.

Companies are switching to first-priced auctions because fair second-priced auctions don’t exist anymore. They have been polluted them with hidden fees and manipulative auction dynamics; exchanges fiddle with clearing prices such that second-price auctions often close near the first price anyway. This lack of transparency between buyers and sellers is what is worrying and gives the incentive to sellers to cheat. The article says that a transparent first-priced auction will squeeze the margins of ad tech players in the middle, and deliver more working media to the publisher. Buyers will finally be privy to the mechanics behind the auctions, and this will make things much more accountable.

The article also points out that the switch comes at a cost: it will force DSPs and buyers to change their buying strategies and build tech for a first-price auction, and with many first-price auctions still nascent and tests conducted in secret, the market is in a state of disarray and confusion, allowing opportunists to realize short-term gains at others’ expense. Thus, transparent first-price auctions can help in delivering more revenue to the buyer and seller by reducing the margins of ad tech middlemen. The question raised by the article now is if these new auctions will work as intended, or if they can be gamed the way second-price auctions were.

Big Changes Coming To Auctions, As Exchanges Roll The Dice On First-Price


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October 2018