Industry Insights

2019: A Year in Review – First Price Auction (Part 2 of 3)

Biggest player finally moves to first price

With 3 days till we usher in 2020, let us take a look at the top 3 events of the year that have had a huge impact in the ad tech space. In no particular order…

Biggest player finally moves to first price

Back in March 2019, Google announced that it will transition over to first price for inventory sold via Google Ad Manager (GAM). It was a big deal for the industry. Not because it was the first time hearing about such an auction model – in fact, first price auction model was introduced way back in 2017 when a couple of exchanges such as AppNexus, Rubicon and Index began testing it out. But it was GAM’s dominance globally which got everyone to start caring about first price.

First Price Auction

For those unaware, second price auction has been the de-facto auction model for programmatic transactions since its inception. In a second price auction, the highest bidder pays 1 cent higher than the second highest bid price for the impression whereas in a first price auction, the highest bidder pays the highest bid price. For example, suppose there are 2 bids – $7 and $5 for a particular impression. In a second price auction, the winner who bids at $7 will only pay $5.01 for the impression while in a first price auction, the winner will pay $7.

Bad News?

Before anyone tries to “fight the change” and find ways around first price especially the buyers/advertisers, let us take a step back and look at what this move brings to the table. Sure CPMs seems like it will be higher for the buy side and while this may look like a way for Google or the sell side to get more at first, I believe its main purpose is actually to allow for a healthier and more trustworthy supply ecosystem to exist. Why do I say so?

Let us go back to the initial second price auction example of $7 and $5. Theoretically, the clearing price on the DSP will be $5.01 and the buyer pays that amount. What if the clearing price was $5.05 or $6.01 or $6.90 in the same $7 and $5 example? The winner will pay that displayed amount since it is lower than the bid submitted which means a second price auction is taking place; no cause for concern because there is no way of knowing what the second highest bid is. Now you see the issue with second price? It allows bid price manipulation to occur because of the price gap and the number of parties involved in the transaction.

Inventory’s “true value” will finally surface…

This is just one out of the many examples out there of the downside of second price. How should we tackle first price then? We shouldn’t; instead, we should embrace that it is the future and approach it the way we approach our day to day financial decisions – that is bid according to how we value the impression.

Inventory’s “true value” will finally surface and whether this move causes an overall increase or decrease in CPMs remains to be seen. Only time will tell once Google completes its transition.

Photo by fotogestoeber on Adobe Stock
Photo by Mykola on Adobe Stock


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