What to know about Google’s implementation of first-price ad auctions
This article discusses how Google will make a shift from second-price auctions to first-price auctions in the coming weeks as well as adding transparency features for publishers and ad buyers. Prior to the announcement, Google participated in second-price auctions. In the interim, demand-side platforms came up with bid shading (paying a price between the first and second bid) as a way to help buyers transition to first price auctions where they have to be willing to pay what they bid, unlike a second price auction where they pay the runner-up’s bid. The article noted that Google is not clear what the effect will be once it has fully switched over to first-price auctions.
Agencies and publishers have welcomed the shift to first-price auctions and the removal of the last look advantage it has within Google Ad Manager on second-price auctions, which will benefit buyers, as well as provide more auction standardization for bidding strategies. Additionally, Google will supply more information on details such as what the minimum bid price that won will provide data to help inform future bidding strategies rather than bid shading or blindly bidding. More visibility can provide a bigger picture for publishers and help them to evaluate the value of their inventory and better understand bidding behaviors. This will also help publishers understand how the market responds to their inventory and the value of their inventory and the influence their rates.
This article relates to class as it discusses how Google will utilize the first-price sealed-bid auctions for their ads. As we learned from class, bidders submit simultaneous “sealed bids” to the seller and the highest bidder wins the object and pays the value of their bid. For Google, all programmatic buyers will compete in one auction, alongside direct-sold advertisers. Bids will not be shared with other buyers before the auction or set the price for another buyer. In this type of auction, a value of someone’s bid not only affects whether they win but also how much they pay. In a second-price auction, paying one’s true value is the dominant strategy, but that is not the case here. By someone bidding their true value, they would get a payoff of zero if they lose (which is more often than not), and they would also get a payoff of zero if they win, since they would pay exactly what it was worth to them. We learned from class that the optimal way to bid in a first-price auction is to lower their bid slightly, so that if they win they will get a positive payoff. Determining how much to shade your bid involves balancing a trade-off between two opposing forces. If someone bids too close to their true value, then their payoff won’t be very large in the event that they win. But if their bid too far below their true value in order to increase their payoff in the event of winning, then they reduce their chance of being the high bid and overall decreasing their chance of winning.
Overall, first-price auctions have the ability to prevent buyers from over-valuing impressions and over-bidding on them so that the bids are better correlated to the value of impressions. Google believes that the change in auction style will help unify and figure out what normality is and will work in favor of their buyers. Additionally, this switch from a second-price to a first-price auction expects that advertisers will lower their bids overall to adapt to the new auction. Advertisers will need to have a more granular understanding of which publishers offer them the most value, once they figure out their true or intrinsic value for an ad.