Real Time Bidding and its Auction Type
Source: https://www.nanigans.com/2017/11/06/real-time-bidding-an-overview-of-auction-types/#:~:text=Real%2Dtime%20bidding%3A%20Second%2Dprice%20auctions&text=Often%20in%20auctions%20the%20publisher,price%20floor%20will%20be%20considered.
Real Time Bidding (RTB) is a relative new algorithm on digital ad market. It is an automatic advertising model that can complete the ad auction within 200 milliseconds. In other words, RTB happens in real time as the website is loading and completes when the loading is finished.
How it works:
The Real Time Bidding starts as a user visits a page, which will send a bill request to multiple advisers (DSPs). This bid request is together with other information about the user, such as the demographic information, location, browsing history, device type and IP address to the adviser as well. The advisers who receive the bid request and has the corresponding ads will send the bid responses to the users. That is where the auction begins.
How the auction in RTB works:
It is not likely that the auction will run by first price auction, because of the same reason we learned from course. First price auction will let the advertisers not to bid truthfully and has the risk of price inflation. Therefore, first price auction is more suitable in private auctions, which are much more low-demanded and less crowded than open Real Time Bidding.
Compared to first price auction, second price auction is more suitable to RTB.
In second price auction, it is the dominant strategy for advertisers to bid at their true values They do not fear that their bid will lead to overbidding because what they bid will not determine the money they pay but only whether they win or not.
In most cases, the ad publisher will publish a price floor, which is the minimum price that they wish to accept. So the winner with the highest bid will pay the bid of the second highest bid plus a small amount of money, usually one cent.
In the example above, Adx is the user who sends a bid request. DSP1, DSP2, and DSP3 response the bid. DSP3 has the highest bid and win the auction, paying $3.76 per 1000 impression.
The Waterfall:
The waterfall explain the situation when multiple ad exchanges are involved, or if no one bids higher than the price floor.
The situation with multiple ad exchanges:
When there are more than one advertiser, the auction works on a “rolling base.” If the ADx Auction successfully take place and its bid is higher than the price floor, the remaining exchanges won’t have the opportunity to take place.
If the ADx Auction fails to meet the price floor, then the exchange will move to AppNexus Auction. It will continue this rolling sequence until the price floor is met.
From the Real Time Bidding we can see how the second price auction is used widely today. Although the auction technique and programming develop, the second price auction still remains to be the central algorithm in the core.