Programmatic Advertising and Auctions
Within the vast online world of interconnected information and global span, people are constantly exploring webpages, which promotes the growth of an online advertising market to reach potential consumers. Over a majority of advertising space available on the internet has been purchased based on the process of programmatically. This process involves a company to buy ad space in an automated way that takes in to account audience data and insights from other sources in making the funal decision to purchase. Most auctions that take place are first price or second price auctions as discussed in class. In a first price auction, the winning bidder will pay for the ad space with the highest, winning price. In a second price auction, the winning bidder will pay for the ad space with the second highest price offered by the bidders. These types of auctions occur in a real time bidding (RTB) scenario where bidders compete for the ad space offered by a website. An alternative bidding process is mentioned in this market that is called header bidding which takes the form of another first price auction. In header bidding, websites will publish ad space that allows a limited number of bidders to place a bid based on a first price auction.
The problem that develops in this competitive market of bidders is when they rely on automated bidding processes that utilize either first or second price auction methods. Algorithms have been traditionally set up for second price auctions with the cost of adapting to first price auctions being significantly more expensive. The increased investment in first price auction algorithms discourages other bidders from adopting this process which leads to a stubborn use of second price auctions. The bidders who have adopted a first price auction mechanism have been consistently outbidding second price auctions which leads to larger values that alter the price second price algorithms will bid. Many programmatic traders are unaware of which type of auction is occurring therefore a second price bidding strategy can be competing in a first price auction. First price auction algorithms have been gaining a larger market share, and the popularity of first price auctions have risen greatly. In theory, algorithms should bid their true value, but the game theory of decisions changes when costs such as the price of investing in new technology and the price of competition for market share which influence bidders to bid otherwise.
https://www.digilant.com/programmatic-buying-101-the-difference-between-first-and-second-price-auctions-in-rtb/