Replacing First-Price Auctions with a Modified Second-Price Model
Last year, large ad exchanges like AppNexus, Index Exchange, and OpenX switched from second-price auctions to running first-price auctions for ad placement. Now, Hearts & Science is calling for a return to a modified second-price model because of the increase in ad prices. Hearts & Science conducted research using an auto-bidder to try to reduce prices. However, the cost per impression were still 54% higher than in second-price auctions. Some demand side platform claimed that switching to first price auctions will balance out once buyers adjust bidding strategies, but even bid shading (bidding below the true value) cannot reduce bids as effectively as a second-price auction. This switch was also met with hostility due to how this switch was conducted. Some exchanges did not notify buyers or notified them after the fact, so all the buyers ended up paying more. Overall, even with modifications, there is still an increase in prices.
In order to switch back to second-price auctions, it must meet two conditions. First, there should be no artificial boosting of the clearing prices. This prevents buyers from bidding optimally. Second, there needs to be a remodeling of the previous second-price auction to prevent a multi-stage auction. This inefficient method sometimes prevents the highest bidder from winning. To begin this reformation, the first step should be to get a third party to referee the auction. Then they would pass all the bids through instead of running in a demand side platform or supply side platform. Once all the bids are through, then the publisher can run a clean second-price auction. This setup would make it more like unintermediated auctions like Facebook, Google, and Snapchat. Through this method, Hearts & Science hopes to create a more refined second-price auction model for future buyers.
Link to article: https://adexchanger.com/online-advertising/hearts-science-calls-to-replace-first-price-auction-with-reformed-second-price-model/