Commentary

Winners And Losers In First-Price Auctions

Between ad fraud, brand safety and transparency, the digital advertising industry had a tough 2017. And now that the conversation about fixing these problems and cleaning up the supply chain has hit critical mass, 2018 is sure to bring new developments and approaches to delivering greater visibility into where ad spend is going and whether or not it’s working. 

One of the big complaints about programmatic is that it’s difficult to understand the true value of an impression. Historically, exchanges have been based on second-price auctions, where the buyer often pays far less than what they were willing to pay. The publisher “loses” the difference between the high bid and amount paid.

In first-price auctions, on the other hand, the winning bid is the amount paid. The publisher seems to come out on top, and one could view the end cost as the true indicator of an impression’s worth. This added bit of visibility has led some to herald first-price as the route to transparency. It is not, however, a win-win game. 

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At the outset, publishers look like the winners of the first-price auction game. Over time, however, the forces of auction dynamics come into play. Bidders, who get little visibility into who sets the bid direction or is in control, may dramatically reduce their bids to test price elasticity, and the publisher ultimately loses.   

And there’s another potential loser in the first-price model: the ad tech vendors in the middle of the transactions. Because the fees, often referred to as the “tech tax,” are disclosed, they can find themselves in a race-to-the-bottom price war in competition for agency and brand business. So they lose, and so too may the brands and agencies that rely on these vendors, since the lower markup for vendors may lead to corner cutting on quality and expertise, which could leave more exposure to ad fraud.

If matters weren’t complex enough, advertisers don’t always have enough visibility into the process to know for sure whether they’re bidding in a first- or second-price auction. As a result, they can’t properly develop a strategy that will optimize their media spend, and again, they lose.   

Now, if everything were a first-price auction, there would be more transparency and a better likelihood of achieving that sweet spot of true value. But that brings up another issue: supply and demand. 

If buyers feel like they’re being scammed, paying higher-than-necessary prices in the exchange, they may give up on programmatic and shift their spend to more “walled gardens,” but that is no guarantee of lower prices. Demand in the open market is then reduced, which then makes prices drop, and ultimately pushes publishers demand and prices lower.

Inside the walled gardens, there are some interesting developments, that may be a foundation for the next evolution of bidding. Facebook’s auction mechanism is an iteration of the second-price model that brings the consumer into the equation. An advertiser only wins the placement of an ad if it actually is the most relevant. With this model, the buyer knows the cost and what the ad is worth. Google, which had previously been using the generalized, second-price auction model, has followed suit. If the industry moves in this direction as a whole, it could ultimately be a win, win with an extra win for the consumer, who gets more relevant advertising.  

The issues are deep and complex. But if we can make access to transparent, comparable analytics easier and enable buyers to act and react real time, it’s a step in the right direction. In the end, we need to give buyers the opportunity to adjust their strategies to allow for relevant ads to win whilepublishers get a fair price, based on their ability to meet the performance goals of the client, closing the gap between winners and losers once and for all.

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