Google: First-Price Ad Auctions
What to know about Google’s implementation of first-price ad auctions
In class we learned about the various auction types and strategies for optimizing one’s participation in those various auctions. Two of the auction types discussed were first price and second price auctions. In first price auctions, the bidder with the highest bid wins the item or auction and pays her bid amount. In second price auctions, the bidder with the highest bid wins the item or auction, but pays the bid amount of the second highest bidder. In discussing these different kinds of auctions, the question comes into play, when it is no longer worth it for a bidder to stay in the auction, or they are losing value. In a second price auction, the dominant strategy would be to bid your value. If you win, this would mean you gain your item or reward and also pay a lower amount than what you want to. In a first price auction, the dominant strategy would be to bid less than what you value. If you were to bid at your value and win, the payoff would be non-existent, thus indicating you should bid less.
This article discusses the transition of Google from second-price ad auctions to first-price ad auctions. The incentive behind this transition is to provide more transparency to all parties involved. Google plans to provide data that will help decision making in future strategies. As the market is now, people have less to depend on when guessing what a good strategy is. It appears that when looking at the market as whole, second price bidding can introduce difficulties for buyers who are unsure of what the range is best to bet in.
This transition will help to eliminate transparency issues, but will also begin to eliminate bid shading. Bid shading results from the unknown range that people have had to guesstimate when considering the highest bid price and the second highest bid price. Bid shading marks down a person’s valuation to account for the possibility of winning, people will accept a chance of losing in order to potentially get a larger payoff by making their valuation lower. This technique will have to be eliminated in order to accustom buyers to paying their full price bid.
The transition to first-price auctions in ad buying poses certain issues, while providing transparency it also is restricting actions made by publishers. Time will tell if the benefits will outweigh the costs.