First-Price Auctions: A Key Piece of The Transparency Puzzle 


In March, Google announced that they’d be changing their Ad Manager Display auctions from a traditional second-price auction to a first-price auction. Google’s move provides publishers with a better understanding of how they can manage and optimize their yield. But there are many other implications towards greater transparency that this shift has created, shares, 

Marc Grabowski, EVP, Global Supply at Criteo.

After months of testing and a chorus of industry chatter, Google has begun rolling out its much anticipated first-price auctions on Ad Manager. 

This move puts Google in line with rival independent ad exchanges but, given its size, the tech giant’s shift will have a far more significant impact. Google was the originator and longtime standard-bearer for second-price auctions, but as this switch takes place, it’s fair to say that we now officially live in a first-price auction world. 

In a blog postOpens a new window , Google stated that the new model will “help our partners simplify how they manage advertising revenue and increase transparency for everyone in the ecosystem.” Ultimately, this decision by Google creates a greater level of transparency in the buying landscape.

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The Road to Change

For years, supply-side platforms (SSPs) and exchanges conducted second-price auctions, in which the winner paid $0.01 more than the second-highest bid. This second-price model proved to be efficient for buyers, but only if there was enough demand in the auction. Otherwise, prices would drop thus hurting publisher monetization. 

Some SSPs, as a result, implemented non-transparent practices, such dynamic floors to increase clearing prices of auctions. Over time, buyers caught on to SSPs and started to calculate ways to bid between the threshold in a second-price auction to lower prices and reduce their clearing costs.

This cat-and-mouse game between supply and demand led to confusion and erosion of trust in the industry. As a remedy to the situation, SSPs started to move to first-price auctions. First-price auctions are simple – the highest bidder wins and pays exactly what they bid. This greatly reduces hidden fees as the final bids are determined by the bidder, so the sum is clear to all and it can’t be manipulated as it has been in second-price auctions. When the bidders know the exact sum to pay, it creates a clearer auction environment for both buyers and sellers.

Google Gets It Right

For a time, buyers, publishers and vendors had to oscillate between the two auction types, as many SSPs and exchanges had shifted to first-price auctions for some time. As a leader in the space, Google’s decision to move to first price unofficially makes this auction model the primary programmatic buying method, creating more transparency and instilling greater trust in the ad tech ecosystem.

Further, Google’s decision to move to a unified auction from a waterfall one could allow them to consolidate direct demand, header bidding demand and open market demand into a single auction. It gives the opportunity for buyers to be on a level playing field, bidding at the same time and paying the actual price that they bid. Additionally, with visibility into the bid landscape of their inventory, publishers can better understand the value of their inventory for future auctions.

The Way Forward for DSPs 

Even though first price offers new advantages, it won’t be easy for demand-side platforms (DSPs) to quickly adapt to the new model. While the largest DSPs have already invested heavily in optimizing auction and price-performance in a first-price world, secondary and most of the tertiary players have not had the luxury to invest in this area and lack the market data as well as bid intelligence to be effective.

Remember, in second price auctions, buyers are accustomed to bidding higher than they expect to clear the bid, knowing the bid will be reduced at the close of the auction. It will now become the responsibility of DSPs to ensure that advertisers do not overpay. To remain truly competitive, DSPs must improve their models to assess proper clearing prices that will drive efficient outcomes for their advertisers. 

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More is Needed for Full Transparency

This shift to first price is only one piece of the transparency puzzle, as the industry seeks to create a level playing field that enables more truthful bidding. More transparency is a positive thing as an open Internet offers fairness and enables all consumers equitable access to information that benefits their needs.