Google Bid Shading
In September of 2019, Google Ad Manager shifted from Second-Price Auctions to First-Price Auctions for their programmatic advertising. Google’s belief behind making the change, a change that many ad exchanges had made long ago, was that First-Price Auctions would increase total revenue and increase the transparency between all parties involved.
It is not a quick and easy adjustment from Second-Price to First-Price, especially for the buyers. One popular solution to help buyers adjust to First-Price Auctions is an in-between auction method called Bid Shading. Bid Shading is an auction where “the buyer will pay something in between what the second-price and the first-price value would have been, based on a calculation made by the ad tech partner” (Davies [2]).
While Bid Shading has helped buyers make the shift, many criticisms surfaced during its period of usage. The buyers’ primary concern was over the algorithms ad vendors use to calculate the price the winner must pay. The algorithms are often complicated, making it easy for ad vendors to slip in hidden fees (Joseph). In addition to complexity, many ad vendors are reluctant to release their algorithms in the first place, making transparency between buyers and vendors difficult.
Under ideal circumstances, a buyer in a Bid Shading Auction should bid their true value because they are guaranteed to pay below their value. In other words, a buyer’s value only affects whether they win or not. Alternatively, if there was full transparency between buyers and vendors, the buyers would know the exact discount that the algorithm calculates for their bid. In this case, buyers should bid above their true value, up to the amount of their value + the percentage discount.
However, Google’s Bid Shading Auction has not seemed to operate under these ideal circumstances. With the lack of transparency between buyers and ad vendors, and buyers’ wariness of vendors, it is not a dominant strategy for buyers to bid their true value. Instead, buyers should bid a bit below their true value in order to mitigate the risk of hidden fees and maximize the possibility of earning a surplus if they win.
Works Cited:
- Davies, Jessica. “What to Know about Google’s Implementation of First-Price Ad Auctions.” Digiday, 6 Sept. 2019, https://digiday.com/media/buyers-welcome-auction-standardization-as-google-finally-goes-all-in-on-first-price/. [1]
- Davies, Jessica. “WTF Is Bid Shading?” Digiday, 30 Aug. 2018, https://digiday.com/media/wtf-bid-shading/. [2]
- Joseph, Seb. “Bid Shading Is Losing Favor with Wary Advertisers.” Digiday, 3 May 2019, https://digiday.com/media/bid-shading-losing-favor-wary-advertisers/.