To support first-price auctions some basic factors must be in place

This evolution of the decade-old second-highest bid model has led to many DSPs feeling that placing bids has become more complicated than it was in the past.

They are used to bidding alongside other DSPs for the same advertising opportunity on a programmatic exchange, the kicker being that each of these would typically bid higher sums than they would be willing to pay. This would be done in the knowledge that the winner of an auction wouldn’t pay the price they bid; rather they would be committed to the price of the second-highest bid.

• For another view on this topic, see "First-price auctions can bring some much-needed trust"

By taking this approach, publishers have accepted that they achieve the highest possible yield. At the same time, pricing stays at a realistic level for brands, agencies and DSPs, which together serves to maintain a reasonable equilibrium.

The shift towards first-price bidding

But things are changing in the industry, and many exchanges are now offering first-price auctions. Despite the good intentions behind the traditional model, the new alternative is being seen as taking a more transparent approach.

This also helps publishers understand better how their inventory is being auctioned and sold, and realise the true value of this as DSPs will be inclined to bid on what they believe it is worth. This is thought to be especially true for various types of inventory, including higher-value advertising such as video and rich media, compared to others, such as display banners.

Meanwhile, because the winning bidder will always pay their actual bid price, the possibility of hidden demand-side fees being incurred is removed.

Beyond these perceived benefits, another factor behind the increasing adoption of first-price auctions is the substantial trend towards header bidding. This approach involves moving a significant amount of inventory into a flattened-waterfall model to level the competitive playing field across inventory and channels. This inevitably drives more programmatic companies to first-price auctions so they can stay ahead of the bidding curve.

I believe that supply-side platforms (SSPs), for example, must clearly flag every single bid request based on whether it is following a first- or second-price auction model. 

As a result of this, the much-needed higher bids for the same inventory is provided by first-price auctions, making it more accessible to many more partners than has previously been the case.
It is yet to be seen if the entire market will now move exclusively to first-price auctions, though this doesn’t look likely in the near- and medium-term future.

How quick is the uptake?

What we can expect, though, is that more and more DSPs will take up this approach and start to bid on a first-price basis, as we are already seeing on a modular, case-by-case basis. This is happening in instances when the relevant inventory, the relevant supply partners and the relevant advertising opportunities have all come together.

To support this ongoing move towards first-price auctions, some basic factors must be in place. I believe that supply-side platforms (SSPs), for example, must clearly flag every single bid request based on whether it is following a first- or second-price auction model. Some SSPs, including Smaato, feel that DSPs will be more comfortable and secure in shifting to first-price bidding once all appropriate processes like this are in place.

As this happens, we are finding that DSPs’ bidding algorithms are evolving to ensure that their learning curves develop more quickly over each campaign than they would in second-price auctions.
And as this new twist on the second-price model continues to straighten, we are bound see more DSPs preparing to bid.

Alex Khan is APAC managing director of mobile ad platform, Smaato