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A More Profitable Auction

Hulu Moves To First-Price Auctions For Its OTT Inventory

Hulu, the popular television and movie streaming service, has historically used second price auctions to sell the advertisement opportunities on its platform. However, this week, Hulu has announced to its advertisers that they will be switching to a first price auction system going forward. This comes following a developing trend in online advertising, with both Google’s and Amazon’s SSP advertising services switching over to first price auctions. Hulu claims that by making this switch, they’ll be “cutting down on complicated rules, increasing transparency in the value exchange and giving advertisers even more control over their buys.” Essentially, they claim that the more clarity that these advertisers will have over what they’re buying and for how much, both the advertisers and Hulu stand to gain from higher quality, better targeted advertisements. However, it appears as though Hulu may be making this change more for the benefit of themselves rather than their advertisers and consumers.

By switching from a second price auction (in which the highest bidder wins and pays the price of the second highest bid) to a first price auction (where the highest bidder wins and pays their bid), Hulu, as the auctioneer, will likely be earning more money from these auctions. We know that the dominant strategy for a second price auction is to bid your true value and that for first price auctions is to shade your bid slightly below your true value, ensuring in both cases that a net gain is made from the auction. These strategies create a situation such that a first price auction is more profitable for the auctioneer than a second price auction. This is because the nature of a first price auction means the price being paid to the auctioneer is close to the true value of the top bidder. In most instances, this shaded value will be higher than the second highest value in the auction, which is what would be paid in a second price auction. This also pressures bidders to bid as close to their true value as possible in order to beat other bidders, minimizing their net gain. As a result, the auctioneer recoups this minimized gain from the highest bidder, earning them more money in a first price auction. Thus, making the switch to a first price auction is an appealing and profitable move for an auctioneer. So, in this instance, it is Hulu who made the smart business decision and will benefit from the nature of auction strategies.

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