• by Tobi Elkin , Staff Writer @tobielkin, June 6, 2016

Programmatic approaches to media are quickly becoming the norm, yet there are many issues that remain unclear. Among them, pricing. Specifically, the fact that auction pricing is all over the place—there is no standard.

While dynamic price floors are considered to be one response to the issue, standards are still needed. For most  supply-side platforms (SSPs) and exchanges, second-price auctions—in which the winning bid pays 1% more than the second highest bidder—are generally accepted as the most effective auction format.

Some in the industry argue over the benefits of second-price auctions. They are generally more widely preferred because they encourage buyers to bid the exact value they think the impression is worth, and they offer buyers incremental value, as they end up paying a discount on what they were willing to pay. Second-price auctions also benefit publishers by allowing buyers to bid more aggressively, ultimately driving up prices in the auction, according to Gabe Bender, product strategy lead at Sharethrough.

However, second-price auctions may cause price inefficiencies by creating large gaps between a buyer’s winning bid and the price he actually pays. In some cases, gaps as high as 70% have been found between the first- and second-price bid. A lack of competition for each impression—also known as low bid density—further exacerbates the issue, causing most impressions to clear at the floor.

So while second-price auctions work, they have inefficiencies.

What’s the answer?

Bender argues that exchanges have access to tons of data for each auction. If they use this data, exchanges can, via algorithms, identify a fair-market value for each impression based specifically on sell-side attributes.

Bender says a sell-side attribute is considered any variable specific to the publisher or user, including URL, placement, time of day, geography, device or user session. Once the exchange has determined an impression’s fair-market value based solely on sell-side attributes, it could then pass that value as the price floor in the bid request using OpenRTB protocol.

The point is that in keeping the attributes specific to the sell side, exchanges can avoid buyer discrimination. By passing the derived value as the price floor in the bid request, buyers are able to respond according to their own data and algorithms, without questioning whether they are facing different price floors than their competitors. That would mean greater transparency.

Bender and others argue that by creating a standard for dynamic price floors, both media buyers and sellers can derive fair pricing, thus reducing  inefficiencies in the auction process.