First-Price vs Second-Price Auction | Differences Explained

blog-cover-setupad-first-price-vs-second-price-auction

In 2019, Google has completed a transition from a second-price auction to a first-price auction model that affects display and video inventory sold through Google Ad Manager (GAM). This does not impact Google AdSense. 

According to Google, this change has been influenced by many reasons. Shady buy-side tactics inside the adtech space have created an uneven playing field, while programmatic has evolved into an increasingly complex marketplace with different auction rules and stages.  

The shift to the first-price auction was indeed much needed, especially with the rise of header bidding, as it was making it difficult to optimize performance in the second-price auction setting. Given the importance of programmatic advertising and RTB (real-time bidding), it’s important to understand the difference between first-price vs second-price auction and decide which one will benefit you the most. 

Table of Contents:

What is a First-Price Auction?

In the first-price auction model, bidders participate in the auction simultaneously, and the highest bidder wins. The highest bidder pays the exact price per thousand ad impressions (CPM) that he bid during the auction. The winning bid is also known as the clearing price. 

First-price auctions generally favor publishers more than second-price auctions. In a survey by Digiday, 78% of publishers said the transition from second-price to first-price auction helped them maximize their ad revenues.

Related Article: How to Increase Ad Revenue | Success Formula and Proven Solution 

In a first-price auction, both publishers and advertisers can assess the true value of each 1000 ad impressions and accurately measure their ROI (Return on Investment). It also provides a clear auction outlook where bidders know how much they’re offering for a given inventory.  

First-Price Auction Example 

Three bidders participate in the auction (A, B, C). Each of the bidders set a price of how much they are going to pay for 1000 ad impressions: 

  1. Bidder A = $3
  2. Bidder B= $5
  3. Bidder B = $4

The highest bid in this auction is 5$. Bidder B wins the auction and pays $5 per 1000 ad impressions to the publisher.  

first-price-auction-setupad

What is a Second-Price Auction?

In the second-price auction model, similarly with the first-price auction, the highest bidder wins. However, the final price is not equal to his initial bid, but just 0.01$ more than the second-highest bidder’s bid. 

Google AdSense is a famous example of a second-price auction. The price paid by an advertiser–cost-per-click (CPC)–is less than the CPC that they bid in the auction. 

Second-price auction has been an industry standard for many years. However, with RTB and header bidding coming to the fore, publishers were able to allow multiple ad exchanges (SSPs) to bid on their inventory simultaneously. Consequently, this created a lot of complexity and operational inefficiency inside second-price auctions. Moreover, second-price auctions often involve hidden fees taken by SSPs. 

Second-Price Auction Example 

Again, three bidders participate in the auction (A, B, C). Their bids are:

  1. Bidder A = 3$
  2. Bidder B = 5$
  3. Bidder C = 4$

The highest bid in this auction again is 5$. Bidder B wins the auction but will only pay 4.01$ (4$ + 0.01$) for each 1000 ad impressions. 

The difference a winning bidder saved on the impression is called reduction. In this example, it amounts to 0.99$ (5$ – 4.01$).  

second-price-auction-setupad

First-Price vs Second-Price Auction 

The main difference between first-price and second-price auctions is that in a second-price auction, publishers receive less ad revenue because the process leads to a reduction in bids. For this reason, publishers sometimes set floor prices which act as a threshold from which the bids are counted. Floor prices aim to increase the closing bid.  

Because of inconsistencies in how different exchanges manage auctions, the first-price auction also ensures greater transparency than second-price auctions. It allows buyers in one exchange to compete more fairly with buyers from other exchanges.

google-ad-manager-unified-first-price-auction-model

Source: Google

First-Price Auction Advantages for Publishers 

  1. Publishers earn more revenue without the bid being reduced.
  2. Publishers can accurately assess how much their ad inventory is worth.
  3. The first-price auction model eliminates unnecessary barriers and provides more transparency.
  4. The first-price auction works better with header bidding allowing for simultaneous bidding and more competitive bids. 

Nevertheless, the first-price auction may motivate buyers to submit lower bids to save money deliberately. This practice is known as bid shading.  

Bid Shading 

Bid shading is what advertisers use to win the impression at the lowest price. It takes the highest possible bid and attempts to predict the market value for a given impression. Additionally, bid shading can steal up to 20% of publishers’ ad revenue.  

An effective way to fight bid shading is by setting a floor price. However, in the first-price auction, floor prices have no impact on the clearing price (the final price paid for an impression), which is what floor prices traditionally have been used for. Instead, the move to first-price auctions forces publishers to reconsider how they use floor prices to protect their inventory. 

Consequently, Google released unified pricing rules which aim to help publishers optimize their floor prices. In addition to concentrating on determining the true value of their inventory, it’s advised to adjust prices for different inventory segments. 


What Does the Future Hold for Publishers? 

Google’s shift to the first-price auction was not the first of its kind; however, it was an important step for the whole media buying and selling. Initiatives such as ads.txt and sellers.json, which were introduced to increase the transparency of the supply chain, are another example of the industry’s demand for trust and operational simplicity. 

We at Setupad believe that first-price programmatic auctions provide a fairer environment for publishers to sell their inventory. We realize that the ultimate goal for buyers is to extract maximum value from every ad impression. Therefore, we strive to help publishers to receive their fair share. 

Our technology increases competition, pushing demand partners to pay even higher prices for ad impressions. We continuously help publishers improve their inventory, making it more appealing for the buyers to compete for. 

Which auction model do you use and why? Let us know in the comments! 

Tus comentarios ayudan