Second-price auctions have been the unquestioned auction model in online advertising since the rise of Google paid search. However, they have rapidly been giving way to first-price auctions in many programmatic ad exchanges, largely due to the fragmentation of demand and complexity of multiple auctions occurring prior to the final ad server decision.
Unfortunately, putting first-price auctions into practice has only exacerbated the already existing problems of today’s complex programmatic supply chain, for both publishers and brands alike. Rather than heading further down the road of more first-price auctions, a new approach to ad serving should be considered which both maintains true second-price auction mechanics and provides true consolidation of demand.
Why Do We Need a New Alternative?
Regrettably for publishers, first-price auctions aren’t likely to actually increase CPMs and will, in reality, only inhibit a publisher’s ability to gain knowledge of the true value of their inventory. Smart bidders will actually bid lower than they would in a second-price auction (often at continuously lower levels) in order to find the bare minimum price needed to win impressions, resulting in lower CPMs and obfuscating pricing knowledge. This is especially deleterious in supply-constrained markets like premium online video, where competitive pressure between buyers is the best way to drive higher prices.
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First-price auctions also don’t solve for brands’ concerns around programmatic complexity — and, they may exacerbate this issue, with multiple vendors and auctions (exchange, header bidding wrapper, and ad server) each taking a slice of the ad dollar. Alternatively, the less complex solution to opaque, multi-layered second-price auctions is not first-price auctions, but instead true, transparent second-price auctions across both direct and programmatic sales channels, resulting in a unified decision and a level playing field for brands and publishers alike.
So What Does This Better Path Forward Look Like?
Despite their current popularity, first-price auctions shouldn’t be the default answer to solving for better marketplace transparency and inventory valuations. Instead, we should be turning attention to the following:
First-price auctions may be increasingly common, but they aren’t the panacea some publishers or brands perceive them to be. As publishers and brands seek an alternative to historical programmatic norms, it’s time that they give fully transparent second-price auctions a real chance.