First-Price vs. Second-Price Auction — What’s the Difference?

If you’ve ever bought anything on eBay, you’re probably familiar with the second-price auction, where the winner pays the second highest bid rather than their own. For years, programmatic ad buying ran in a second-price auction format with the whole transaction happening in milliseconds. However, there’s been a shift among many publishers to a first-price auction model, where what you bid is what you pay if you win the impression.

Bidding in a first-price auction with a second-price strategy can get expensive quickly. Yet, nearly half of buyers are still in the dark on the basic differences of the first-price versus second-price auction according to The Drum. Without a clear understanding of the mechanics in play for each auction, how can you know the right price to pay to get the best value from your media?

Let’s start with clearing up a few quick terms:

— First-Price Auction: Digital buying model where if your bid wins, you pay exactly what you bid. This maximizes revenue potential for the seller.

— Second-Price Auction: Digital buying model where if your bid wins, you pay $0.01 above the second highest bid in the auction. In this type of auction, it’s in your best interest to bid the highest amount you are willing to pay, knowing that often you’ll end up paying less than that amount.

— Header Bidding: A popular type of first-price auction where publishers place a piece of code on their webpage headers that allows a limited number of advertisers to bid on inventory outside of their primary ad server. This lets advertisers compete for premium, reserved inventory prior to or in lieu of the second-price auction.

— Price Floor: The minimum price a publisher will accept for its inventory. Publishers ignore all bids below that price. This, in effect, turns a second-price auction into a type of first-price auction.

— Clearing Price: The final price paid for an impression.

How It Works

Here’s a quick example of what happens when you place a bid in a first-price versus second-price auction:

First-Price Auction

Advertiser A bids $2.00

Advertiser B bids $3.00

Advertiser C bids $4.00 (Winner)

Clearing Price = Advertiser C pays $4.00 for the inventory.

First-Price Auction Benefits

— With header bidding, get a first look at valuable inventory that may not become available in a second-price auction.

— Value — and pay for — specific sites or audiences at their actual worth to you.

First-Price Auction Limitations

— A publisher’s price floors make it difficult to know the true market value of inventory. This means many bidders guesstimate and overpay or underbid and miss out on valuable inventory.

— The bidding infrastructure on most sites is not set up for a first-price auction, slowing down page load times and compromising the user experience.

— Most DSPs don’t have the technology to distinguish first-price auctions from second-price auctions or to combat SSP price floors.

Second-Price Auction

Advertiser A bids $2.00

Advertiser B bids $3.00

Advertiser C bids $4.00 (Winner)

Clearing Price = Advertiser C pays $3.01 for the inventory.

Second-Price Auction Benefits

— Funnel clearing price savings back into your campaign for greater reach.

— Gather data on the closest competitor’s bid to optimize future offers when you win an impression.

— Ensure a positive user experience since most publishers have already built the infrastructure to handle a second-price waterfall.

— Take advantage of DSP technology and algorithms specifically designed to respond to marketplace changes and other real-time factors.

Second-Price Auction Limitations

— Often, no data is available on the clearing price if your bid doesn’t win the impression.

— Set-it-and-forget-it bidding approaches may cause you to miss out on extremely valuable inventory if your static bid is too low.

3 Strategies to Maximize Spend Across Auctions

1. Look for machine learning technologies built for the new environment that can identify first-price auctions, predict price floors and adjust your bids accordingly.

2. Find a DSP that operates effectively in both auctions and can handle the increase in bid density.

3. Rather than concentrating solely on the data from bids won, regularly evaluate lost impression data as well to improve your bidding strategy.

Now that you know bidding basics, find out if you’re getting the most value from your media. If not, now access the world’s leading independent self-service media buying platform with our flexible minimums, full-service support and cross-channel reach. Goodway has become The Trade Desk’s first certified partner. Learn about this exciting opportunity now.