If you have ever bought anything on eBay, you are 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 has been a recent 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 is in your best interest to bid the highest amount you are willing to pay, knowing that often you will 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.