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Real Time Bidding, Header Bidding, and Programmatic Advertising all largely rely on auctioning visits to demand partners simultaneously. What’s the difference between first-price and second-price auctions and how do they change the digital landscape?
What are First-Price and Second-Price Auctions?
In the simplest terms, both auctions select the highest bidder as the winner of the auction. Makes sense, we want to choose the guy who wants to pay us the most. The difference comes when it’s time to pay. In the first-price auction, the winner pays us what they offered as their bid. In the second-price auction, the winner typically pays us $.01 more than what the 2nd highest bidder offered to pay.
Aren’t Second-Price Auctions Always Better For the Buyer?
Now, I know what you’re thinking. If you’re an advertiser who’s bidding for traffic, you want the 2nd-price auction method, and if you’re a publisher who’s selling your ad space, you want the 1st-price auction method.
Unfortunately, it’s not that simple. Let’s take a look at an example of a header bidding auction:
Justyna bid higher than the winning bid but didn’t win. This is not beneficial for her as the advertiser, if she wants this traffic. Why is this happening? In this scenario 2 auctions are taking place.
The first auction is the internal auction in the DSP where Justyna bid $16.00, which she wins because she’s the highest bidder. The second auction is external, between DSPs competing in the auction for the visit from the publisher.
Her DSP works on a second-price auction, so even though she wins they select the second bidder’s price plus $.01 as the bid for the second auction, thereby bidding $9.51.
Whether the publisher uses first-price or second-price auction is irrelevant at this point because the highest bidder will still win. Since another DSP bid is $15.00 which is less than Justyna’s original bid, but more than the bid her DSP used, the other DSP wins.
Most publishers use first-price auction so they take the $15.00 bid and the auction is done. As you can see, in this example, both the publisher and the advertiser lose. If Justyna’s DSP used first-price auction and bid with his price, he would have won the traffic and the publisher would have sold the traffic at $1 more.
So, What is a Conclusion?
Programmatic advertising has many layers and deals are made with many middle-men. Due to the architecture of auctions feeding into secondary or tertiary auctions, it’s not always in anyone’s best interest to use second-price auctions.
Which Auction Price Strategy Does Voluum DSP Use?
From what we’ve gone over so far, you can see that both first and second-price auctions have their upsides. Voluum DSP is the best of both worlds, as we optimize user bidding by having both first-price and second-price auctions.
Voluum DSP is completely transparent about bidding strategy and users can always see which Advertising Networks use which auction strategies during campaign setup. Example below:
Bidding strategy is not the biggest determining factor of a campaign’s success. The list of other factors like target demographic, offer vertical, choosing the right affiliate network, creative style, and others can be far more influential. So don’t get hung up on the first and second-price bidding auction when you’re optimizing your campaign.
If you ever need more tips on how to get the most out of your campaign strategy, reach out to your Voluum DSP Account Manager for professional insights.