From Second to First: The Changing Face of Auction Dynamics

The discussion around auction dynamics is shifting. Many believe the second-price auction has dominated for too long; and with a greater focus on transparency across the programmatic supply chain, maybe a first-price auction model is the answer. At Advertising Week Europe on 22 March, PubMatic chairs a session to discuss just that, asking experts from both buy and sell sides to discuss why auction dynamics are shifting, and whether the first-price auction really is the future. Ahead of the discussion, ExchangeWire speaks with panellists Dan Larden, global strategic partnerships director, Infectious Media; David Hayter, data and technology director, Shortlist Media; and PubMatic's chief growth officer, founder, chairman, and the session's moderator, Amar Goel (all pictured) about the changing face of auction dynamics. 

ExchangeWire: Why have second-price auctions been the model of choice for so long?

Dan Larden, Infectious Media: From an economics standpoint, the second-price auction should drive the behaviour with the best outcomes for both buyer and seller. It encourages people to bid at the maximum level they are comfortable with, safe in the knowledge that market demand will decide the best price.

Amar Goel, PubMatic: Second-price auctions have seen widespread adoption, from eBay to Google AdWords, because they incentivise buyers to bid their true value while the meaningful gap between bid price and closing price delivers 'buyer happiness'. Classic auction theory suggests they are the most efficient auctions.

David Hayter, Shortlist Media: The second-price model in itself is a good model. Simply, it works.

I believe it keeps buyers and sellers honest. As a publisher, it’s really difficult for me to game a second-price auction and it forces buyers to bid honestly if they want to win.

ExchangeWire: Yet the model has its detractors. What are the pitfalls of the second-price auction?

Dan Larden, Global Strategic Partnerships Director, Infectious Media

Dan Larden, Infectious Media: Second-price auctions fall down in online display for two reasons. Firstly, there is an excess of supply versus demand, meaning many auctions only have a single participant. Secondly, people tend to bid too high for each impression because they don't consider the volume of potential impressions that fit their targeting criteria.

These two factors lead to a cacophony of DSPs bidding the same amount for every auction. Add to this, publishers implementing variable price floors to deal with auctions with a single participant; and this generates inefficiency in the market that harms publishers.

David Hayter, Shortlist Media: Unfortunately, the second-price model is easy for companies in the middle to hide fees to both sides. If it hadn’t been for some great investigative work by various publishers (such as the Guardian and more recently News UK) then I’m not sure we’d be having this debate.

What is driving the shift to the first-price auction model?

Dan Larden, Infectious Media: Header bidding has been the major driver of this. Last year, before publishers or SSPs started being transparent on auction dynamics, we were able to use bid data through our DSP to determine which were header auctions. Our analysis showed 90% of header auctions were non-transparently first-price.

With so many SSPs competing for each impression, this makes sense. It has triggered a 'race to the top', with each SSP trying to pass on the highest price to have the best chance of delivering the winning bid. ​

Amar Goel, PubMatic: Many SSPs have implemented strategies, including dynamic floors or modified second-price auctions, to be competitive within a header-bidding environment and improve publisher yield. This has resulted in significant inconsistency across auctions and a lack of transparency for buyers into how auctions are operating. Moving to first-price auctions helps address some of these challenges.

David Hayter, Data & Technology Director, Shortlist Media

David Hayter, Shortlist Media: Estimates are that 60-80% of publishers are now using header bidding; and that’s a great thing. The rise in header bidding, though, has lead to a huge jump in costs for the DSPs that are having to process so many more bids. As publishers, we are running multiple second-price auctions and then making them compete in a first-price auction. This has meant that neither side (buyer or seller) is always able to recognise the true value of a bid.

The other key factor is transparency. The second-price model does leave room for ad-tech players to take undisclosed fees; and whilst the first-price model on its own doesn’t solve this problem, it makes it much more likely that anyone taking these fees will be caught.

What are the outcomes from the perspective of the buyer and the seller, when moving to first-price?

Dan Larden, Infectious Media: The first outcome will be that the less sophisticated bidders, that bid the same amount each time, will stop providing any kind of performance results for their clients. This will create a short-term boost to some publishers' CPMs, although sell-through will probably drop as overall budgets themselves will not change.

However, there will be more and better competition for premium inventory, as buyers, who were accidentally second-priced out of a first-price auction, get to properly compete. More importantly, it should end the gaming of the system, with publishers varying their floors and tech partners pretending auctions are second-price when they're actually first.

Ultimately, we should see better valuations of premium and non-premium inventory, which should hopefully reduce the number of impressions, thereby increasing overall yields for publishers.

Amar Goel, PubMatic: Simplification of how the auction works is one key benefit of the move to first-price auctions for both the buyer and seller. The buyer gains clarity about auction mechanics so they can develop efficient bidding strategies. Unfortunately, the seller is short-changed in a true first-price auction because they no longer truly understand how much the buyer was willing to pay for inventory, but only what they are paying (i.e. the bid).

David Hayter: Shortlist Media: Communication and planning is key. From a seller's perspective, it’s vital to have open conversations with buyers to ensure they can support or will bid into a first-price model. In mid-2017, Shortlist looked into adopting a first-price approach, but only two of our top 20 programmatic buyers could, or would, support a first-price model. At the time, it was felt best to stick with the second-price model and look at ways we could make this work better for both us – the publisher and our buyers.

Communication between publishers and their exchanges is also key: knowing what fields are passed in the bid request from SSP to DSP and making sure these correctly flag the auction type.

How does a first-price auction affect a buyer’s bidding strategies?

Dan Larden, Infectious Media: Those on the buy side who have invested in their algorithms will not be badly affected in terms of an initial increase in price. It is the ones who bid at USD$15 flat on a very large number of auctions and expect to win only a small amount and net out at USD$2 who will be affected.

Amar Goel, Chief Growth Officer, Founder & Chairman, PubMatic

Amar Goel, PubMatic: The most important factor affecting buyers’ bidding strategies is consistency of auction mechanics. In a true second-price auction, many buyers would bid their true value for an impression to maximise their likelihood of winning the auction. However, in a first-price auction, many end up reducing their bids below their true willingness to pay to ensure they retain value. In this scenario, the determination of bid price would no longer be based upon the value of an impression, but rather by how little the buyer can pay to win. This will cause publishers to make less money, over time.

What effect does moving to a first-price auction have on publisher monetisation?

Dan Larden, Infectious Media: There should be a short-term CPM increase which should, over time, change to a long-term yield increase. However, not all publishers will benefit since there are a lot of non-premium impressions that are probably being overvalued right now. There will definitely be some normalising of the market over the next few months, which should be interesting to watch.

Amar Goel, PubMatic: In the short-term, moving to first-price auctions increases publisher monetisation, as the gap between bid price and closing price is eliminated. However, this is also because most buyers and DSPs have not built sophisticated technology to handle this. But, over time, we believe that buyers will develop algorithms to help minimise the price they would otherwise pay for inventory.

David Hayter: Shortlist Media: For publishers, moving to a first-price model appears to only offer benefits. Personally, I’m not yet convinced. I think there is a misheld belief that moving to a first-price auction will increase prices when, what I think will happen, is that prices eventually return to their current levels. Publisher CPMs will increase short term as buyers are made to alter their strategies but, once they have, we’ll see an adjustment in prices that leads buyers to pay roughly what they are paying now.

There are no changes I can see from an operational perspective. The header bidding setup we have now works for us. I suspect that, overtime, we’ll see a drop in bid density as buyers find a single route to buy a user; and that’s no bad thing.

Is the first-price auction the answer? Is there another solution whereby the SSP and the DSP are both operating with maximum visibility into the bid stream?

Dan Larden, Infectious Media: First-price is an easy answer to the valuation problem. But it doesn’t really help visibility. The only way of doing that is to start providing winning bid prices to all the buyers who didn't win the auction, using loss notifications. This would allow algorithms to better understand how the market is valuing each impression and bid smarter depending on the real supply/demand curve at the time.

This would require a huge change in mindset, however, as many buyers think this would expose too much information about their intentions. It would be interesting to see if an exchange or SSP decides to start trialling this in future to see what effect it has on bidding behaviour and overall valuation of each impression.

Amar Goel, PubMatic: The industry moved to first-price relatively quickly; and we believe quite irresponsibly. For one SSP to say they are moving every buyer and publisher over automatically without any real discussion has substantially contributed to the lack of transparency issues in the industry. PubMatic supports both first- and second-price auctions, and we understand how the industry got here, but we also understand that first-price auctions can reduce efficiency for both the buyer and seller. To be truly transparent, we should continue to iterate the RTB spec so that all of the major variables (including whether an auction is first-price, true second-price, or modified second-price) in an auction can be communicated via an RTB request.

David Hayter: Shortlist Media: First-price auctions offer an answer. I’m not sure if it is the answer. If we look at what has brought about the rise in first-price auctions, it's supposed to combat hidden fees being taken from both the buyer and seller. From my experience, I would argue that an ad-tech company can just as easily manipulate a first-price auction as they can a second-price model. I think that the second-price model can be made to work, it just requires us to rethink where the auction is being closed. Where publishers working with multiple SSPs are running multiple seconds-price auctions, and then making these compete in a first-price model, we need to get to a world where all exchanges submit first-prices and all bids close using a second-price model. Regardless of the auction model that succeeds, SSPs and DSPs need to give more insight into raw log-level bid-stream data. By doing this, then we move towards a place where buyers and sellers have full transparency over their part of the bid-stream, without risking exposure of any commercial agreements.

PubMatic are hosting the panel discussion, 'From Second to First: The Changing Face of Auction Dynamics', at Advertising Week Europe on Thursday, 22 March on The Guardian Stage at 10:55am.