First Price Auction and Second Price Auction – basic differences

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First Price Auction and Second Price Auction – basic differences

What is the First Price Auction model? We answered this question a few months ago in this post on our blog. It was shortly after Google announced the introduction of this ad sales model. Now we would like to compare the two most popular auction models and discuss the differences between them.

 

What is Second Price Auction?

Let’s start with an example.

We have 3 bidders, each of them proposes the following amounts that they are willing to pay for an ad impression:

 

The bidder – $3.00

Bidder – $3.60

Bidder – $3.30

Who of them wins? The winner will be the highest bidder 2 ($3.60), but the fee to be paid will be the second highest bid in the auction ($3.30) plus $0.01. In this example the winning bidder will pay exactly $3.31.

 

Curiosity

It is worth mentioning that the model currently called Second Price Auction, many years ago functioned as the “Vickrey System”. Wikipedia explains this term as “a technique whereby those interested in purchasing a facility make price offers that are not made public. The highest bidder wins the auction, but he only pays what the next highest bidder has offered. The system was developed by economist William Vickrey and the first descriptions date back to 1961. In practice, it began to be used in the 1970s. Vickrey himself was of the opinion that this way of conducting auctions allows to reveal the real price that buyers are able to pay.

 

Time for change!

For years, the Second Price Auction model has been a standard that the industry has accepted, despite being fully aware that it leaves much to be desired. Its big downside was the lack of transparency and revenue-limiting restrictions that the First Price Auction model introduced this year by Google has put an end to.  It is worth adding that independent adexchange exchanges (e.g. Index), practiced this model several years back.

 

What characterizes the First Price Auction model?

Here we will also start with an example. Let’s go back to the bidders and the prices for the advertising page view – as a reminder:

Bidder – $3.00

Bidder – $3.60

Bidder – $3.30

This time again the winner is Bidder No. 2, but the amount he will pay for the show will be exactly the same as he bid – $3.60.

 

As you can see, the First Price Auction model seems to be fairer for the market and actually reflects the nature of the auction in its full meaning. Thus, it increases the winning rates of buyers and the publishers’ ability to generate revenue.

 

More about First Price Auction here.

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