First price auction

Auction types vs. programmatic deals

To kick off the article, let’s start by explaining the difference between auction types and programmatic deals. Auctions types are mechanisms through which ad inventory is bought and sold in real-time. There are two main types of auctions: first-price and second-price. Programmatic deals, on the other hand, are basically ways in which publishers and advertisers participate in the programmatic ecosystem – here are three main types:

• Open auction is the most popular type of deal and, as implied by its name, allows all eligible buyers to participate;
• Private auction, on the other hand, is an invite-only auction, which means that the list of participants is limited, and only a selected group of advertisers can bid. Leading platforms with large numbers of impressions, like Business Insider, often offer this type of auction;
• Programmatic Direct deals are agreements between advertisers and publishers. Notably, exchange parties do not participate in them. There are two main types of Programmatic Direct deals:
  • Preferred Deal (a non-guaranteed deal) – in this arrangement, the advertiser negotiates terms with the publisher but is not required to purchase the ad inventory, but he has priority for doing so. However, if they decline or propose a lower price, the inventory will then be available in the open or private market for other bids,
  • Programmatic Guaranteed (a guaranteed deal) – a contract between a publisher and an advertiser where all the terms are detailed (like the number of impressions purchased and their price). The buyer consents to buy a predetermined number of impressions.

What is first price auction?

In programmatic advertising, a first-price auction (also written without a dash as a first price auction) is a model where the highest bidder wins, paying the total amount of their bid. This final price for a bid is called the clearing price (both in the case of first and second-price auctions). Notably, the rules of a second-price auction differ significantly from those of a first-price one, but we will explain more in the following paragraph.

The difference between first-price and second-price auctions

Although the winning bidder pays for the offer in first-price and second-price auctions, the advertisers’ final price differs significantly. As mentioned before, in first price programmatic auctions, advertisers pay exactly the price they bid for, while in second price ones, it’s more complicated – the final price paid in that situation equals the second-highest price plus 0.01$.

How does the first-price auction work (examples)

To better illustrate the first price vs second price auction differences, we will use two simplified auction examples. While programmatic auctions typically involve numerous bidders, our examples will focus on a scenario with just three bidders:

A first price auction example:

• Auction details: bidder A, bidder B and bidder C participated in the auction;
• Bids: bidder A at 1$, bidder B at 3$ and bidder C at 2$;
• Outcome: the winning bidder (B) pays 3$.

To clearly illustrate the distinction between auctions, here is a second price auction example:

• Auction details: bidder A, bidder B and bidder C participated in the auction;
• Bids: bidder A bids at 1$, bidder B bids at 3$ and bidder C bids at 2$;
• Outcome: as in the first example, bidder B gets the chance to buy the ad space; however, the winner pays 2.01$.

Why first-price auctions became so popular

In the early days of programmatic ads, second-price auctions were popular because they fit better with dominant waterfall setups. In a waterfall setup, inventory was sequentially presented to buyers. This allowed the second-price model to be effective, as buyers could submit their highest bids but would end up paying the lower, second-highest price plus a small additional fee. Header bidding changed things by letting multiple buyers access the same inventory simultaneously. In consequence, more competition for each impression was introduced. Today, first-price auctions are the standard across Google’s publisher monetization platforms, although this shift has been gradual:

• Google AdMob has been utilizing the first-price auction model since 2019, providing app developers and advertisers with a straightforward bidding process;
• Google Ad Manager, including Ad Exchange, has gradually evolved its auction strategy towards first-price auctions – from 2019 to 2024;
• To follow industry practices, Google AdSense switched to a first-price auction system in 2021, joining the platforms mentioned above.

Shift for the better

A few years ago, when some Google platforms announced shifting to first-price auctions, many advertisers raised concerns about potential impacts on ad costs and overall return on investment. They were afraid that first-price auctions would result in higher prices per impression. For first-price auctions to function effectively, it’s crucial that buyers have a clear understanding of the fair market value of each impression they’re bidding on. This knowledge helps advertisers make more informed bidding decisions, minimizing the risk of overspending. Despite initial concerns, first-price auctions became a standard in the industry, and now we can see how this model also benefits advertisers:

• Generally, first-price auctions simply make things easier, while in second-price auctions, advertisers often pay an unpredictable price. With a first-price auction model, brands gain more control by getting a predictable cost, allowing them to plan ad budgets and media strategies more confidently;
• With no hidden fees, brands gain transparency, as all extra costs are disclosed upfront, increasing confidence and improving ad budget management.

First-price auction advantages for publishers

The first price auction model brings several benefits to the publishers – here are some of them, according to Google’s round of tests carried out in 2019 during their transition to first price auctions:

• It was determined that the change to first price auctions produced a neutral or favorable influence on publishers’ ad revenue when evaluated alongside the second price auction model;
• Furthermore, Google’s evidence indicates that third parties (like DSPs outside of Google) and indirect line items (like those from header bidding implementations) win a larger share of impressions via competitive bids, suggesting that first-price auctions have boosted market competitiveness.

However, other benefits include:

• The second price auction model often led the ad inventory to be undervalued as opposed to first price auction model, where the highest bid means the highest price paid to the publisher;
• First-price auctions greatly diminish the risk linked to bid shading, which is a strategy of placing a bid below their worth (or what a bidder thinks is their true worth). The main aim of such a bidder is to pay for the placement of their ad at the lowest possible price. Another way to fight such practices is by setting minimum prices, but we will delve into that in more detail in the next paragraph.

Minimum price – a safety measure for publishers

After explaining the benefits of first-price auctions for publishers, it’s important to introduce another concept that can help safeguard your earnings: price floors (or floor prices, CPM floors, or bid floors). In programmatic, it’s a minimum bid price that safeguards the value of ad space, thus protecting ad revenue. During a programmatic auction, advertisers submit their bids in real time, and any bid below the floor price is automatically rejected by the publisher. However, it’s crucial to remember that the price had to be set at a “sweet spot”, meaning not too low to prevent underselling but not too high so it is eventually sold.

What’s more, it’s vital to know that there are two types of price floors:

• Hard floors are a minimum bid price, excluding any offers below it;
• Soft floors are set above hard floors, allowing advertisers to place initial bids below them. The main aim of those is to enable bids that fall just below the hard floor to still be considered.

What’s vital is not only website publishers, but also app developers shouldn’t underestimate the importance of setting minimum eCPM prices. This has been especially true since October 31, 2023, when Google shifted its focus to header-bidding auctions instead of waterfalls (however, the hybrid model of combining waterfall and bidding is still a very effective monetization strategy). Two of the most popular ad mediation platforms, MAX by AppLovin and Unity LevelPlay, allow users to establish eCPM floor prices. If you want to optimize your app monetization strategy even more, you can, for instance, opt for Bidlogic automation of bid floors optimization. Regular testing and adjusting the bid floors help maximize performance while reducing manual workload, and the Bidlogic technology does just that!

The times they are a-changin’

Historically, second-price auctions dominated the programmatic ecosystem. For an extended time now, the three primary Google monetization platforms, Google Ad Manager, AdSense, and AdMob have all adopted the first-price auction model. This approach has allowed for more competitive bidding, helping publishers maximize their ad revenue by ensuring they receive the highest possible bid for their ad inventory. Additionally, this shift reflects a broader industry trend toward greater transparency. As a publisher, don’t wait for the industry to evolve; take action to boost your ad revenue! Simply review our requirements, complete the registration form, and let us handle the rest!