Any auction, whether it’s for art, real estate, or digital advertising, needs to be transparent in order to function properly. After all, how can you know what price to bid if you don’t know how your bid will be evaluated in relation to others?
Yet, that’s exactly the situation many advertisers find themselves in today when they buy programmatically. Inconsistent auction mechanics across sell-side platforms have muddied the waters and made it nearly impossible for buyers to employ consistently-effective bidding strategies.
That’s why AppNexus has joined other industry actors in embracing transparent auctions to create a more fair and open digital ad marketplace.
What’s wrong with auctions today?
No matter the type of auction, a buyer needs to know the rules in order to come up with the right bidding strategy. For instance, in a first-price auction, bidders should, in theory, submit a price below the maximum they’re willing to pay but still higher than what they think others will pay. In a second-price auction, however, they should bid the maximum they’re willing to pay, since the amount they’ll actually pay will be reduced to the second highest bid.
Unfortunately, programmatic bidders today often have no visibility into what kind of auction is being run. And it’s not just a question of first-price vs. second-price dynamics. Many publishers and SSPs use custom auction logic like soft floors to increase clearing prices. A soft floor is a price threshold the publisher chooses for an auction – above the floor, bids are evaluated on a second-price basis and below the floor, they’re evaluated on a first-price basis. When soft floors are deployed non-transparently, bidders are even less sure of the optimal bidding strategy. This forces them to try out several different SSPs to find the optimal path to supply, resulting in wasted money, time, and effort.
Header bidding has also changed auction logic dynamics. Specifically, it’s put a crack in the longstanding industry belief that second-price auctions are fairest. How? Once the header collects bids from all of a publisher’s demand partners, it passes those bids through to the ad server where a unified, first-price auction determines the winner. The problem is that many exchanges and SSPs hold a second-price auction to determine which bid it sends to the header, putting all of its bidders at an inherent disadvantage. Check out the example below:
|Highest bidder||Second bidder|
|SSP 1 (1st price)||$5||$4|
|SSP 2 (2nd price)||$6||$4|
In this case, SSP 1 would pass the header a winning bid of $5 from Bidder 1, while SSP 2 would reduce the winning bid to the second price of $4 and pass that through. The top bidder on SSP 2 would lose to SSP 1’s winning bid of $5, even though they were willing to pay $6. This example shows that in header bidding scenarios, second-price auctions give bidders a much lower chance of winning the impression.
How is AppNexus addressing these problems?
We’re joining industry peers in enforcing transparent auctions. By the end of September, AppNexus will signal to all bidders what kind of auction they’re in – either first-price or second-price – in the bid request. Any auction marked as second-price will no longer contain soft floors, while those marked as first-price will. Why first-price? Our analysis of billions of AppNexus transactions has shown that in soft floor auctions, it is optimal for bidders to behave as if they’re in a first-price auction, since most bids end up coming in below the floor.
We’re also going to make first-price auctions the default for all header bidding inventory on our platform. After months of testing, we’ve confirmed that moving header bidding inventory to first-price improves buyer supply access by enabling every bid to compete on a level playing field in the final auction. We expect bidders will also have an easier time deciding which SSPs to work with when all of them give bidders an equal chance to win header bidding inventory.
Finally, we’re going to give publishers the option to make non-header auctions first-price as well. We’re seeing a number of publishers employ server-side solutions in which ad servers gather bids from multiple platforms and then hold the final auction. While these cases do not utilize header bidding technology, the auction mechanics are similar in that winning bids are being collected from many different auctions and then pitted against each other in a final first-price auction. Letting buyers “pay what they bid” using transparent, first-price mechanics will also help them achieve fairer outcomes.
A transparent internet is a better internet
By standardizing the auctions on our platform and making them more transparent, we expect buyers to achieve higher win rates and more easily identify the SSPs that give them the optimal path to their preferred supply. This will make it easier than ever before to buy and sell digital inventory and foster a more liquid, fairly-priced marketplace.
To learn more, watch the white-boarding session we recorded below where Product Line Manager Kevin Cabral outlines the basics behind auction mechanics and the platform changes we’re making.
We encourage any publishers or buyers with questions to get in touch with their account manager or contact us here.