How Ad Publishers Manipulate Second-Price Ad Bidding Services
https://adexchanger.com/ad-exchange-news/the-dark-arts-of-second-price-auctions/
Today, many real-time ad bidding services utilize a second-price auction system, where advertisers will bid on a certain ad placement on the publisher’s platform and the highest bid will pay a clearing price which is the price of the second-highest bid plus an added fee. These added fees can be as low as one cent, but publishers essentially have free reign over how high they would like to set their clearing prices, as long as they remain less than the highest bid. In general, second-price auctions are great for a bidder to ensure that they exit the auction with a net positive value or net-zero value by bidding the exact amount for which they value the object. In other words, the bidder will either lose the auction and be indifferent to the outcome (net zero value) or win the auction and pay less than what they actually valued the object for (net positive value) or worst case scenario pay exactly what they valued the object for (net zero value). Either way, it is ensured that no matter what, with a dominant bidding strategy, nobody will leave the auction paying more for something than what they valued it for.
However, one major issue for advertisers is the publisher’s ability to manipulate second-price auctions by charging high “bidding fees” or “buyer fees”. Generally, real-time ad bidding services lack full transparency, so a bidding advertiser will have no way of knowing how much of the price they paid was actually the second-highest bid and how much was simply an added fee. With this lack of transparency, publishers can easily charge additional fees anywhere from one cent to the difference between the highest bid and the lowest bid. For example, if the highest bid is $7 and the second-highest bid is $4, the publisher could charge the highest bidder anywhere from $0.01 to $2.99 in added fees. Another major concern for advertisers is a practice used by many publishers known as “dynamic floor pricing” where minimum prices can be set and adjusted in real-time to prevent buyers from determining bidding patterns. Often publishers will dynamically set their floor prices somewhere between the highest bid and the second-highest bid. Due to the lack of transparency with ad bidding services, a buyer typically will be fully unaware if the price they paid was reflective of the second-highest bid or some higher set floor price. Using the same auction example as before, a publisher could dynamically set the floor price anywhere between $4 and $7, and the winner may very well end up paying much more than the $4 price which one would expect from a second-price auction. Although a buyer can still ensure that they exit with a positive net value using a dominant bidding strategy, price manipulation in ad bidding has become a common practice and there is often no way for a buyer to know if they are being charged far more than they should be.