Shift from Second Price Auction to First Price in online advertising
How Do First-Price and Second-Price Auctions Work in Online Advertising?
With the increasing popularity of technology, online advertising systems are used more. Recently, there has been a shift from second-price to first-price auctions. This is due to the lack of transparency that a second price auction has. It is commonly caused by the inconsistencies between different platforms or the raise of price floors without buyer’s knowledge. However, first price auctions may not be the best for everyone as well because there is less incentive for advertiser to bid their true value. To compensate for this, ad exchanges are starting to implement both soft and hard price floors. Hard price floor is the minimum price that the seller is willing to take for the impression. Soft price floor is the price that is slightly less than the minimum price, designed to take those offers. The way it works is if the price is lower than the hard price floor than the bids are eliminated. However, if the bid is slightly lower than the soft price, then a first price auction is run. The bids higher than the soft floor price, then a second price auction is run. This method maximizes publisher’s profit and bidders can avoid paying too much.
This relates to what we learned in class because we talked about different methods of pricing ad slots including generalized second price auctions and VCG. Bidders are asked to give their value and a price is generated from the bids. Depending on the situation, there can be multiple methods used. So maybe first price auction isn’t the best option. First price auctions benefit the sellers more than they do for bidders. Uncertainty remains and there will be flaws in all methods.