The ‘Temporary’ Problem with Second Price Auctions

by Andrew Casale (VP Strategy)

I am not an advocate of dynamic floors. Nor do I think switching RTB to first price auctions is likely to happen. Every auction that publishers have run on our platform, to date, has been a true second price auction with no dynamic floors or other algorithmic market manipulations. I am merely commenting on this debate with a different perspective formed on the basis of actual bid data.

Everyone actively participating in RTB from the sell side has generally brought most, if not all, of their unsold supply to the party. Some are now even bringing their sold (read: premium) supply to the party by activating bid requests at the time of their raw ad calls and letting RTB demand compete with direct sales. Therefore, while the supply side of the scale is full, publishers participating are still waiting for demand to catch up. The estimates I see in practice and hear about is that somewhere between 25-30% of unsold display is cleared through RTB. While we have, for arguments sake, 100% of the supply available, we have nowhere near 100% of the demand available to fill it.

How this gap manifests in the second price auction model is that many impressions get one or no bids, and therefore effectively clear at the floor. However, a (very) small number of impressions do get multiple bids.

The thing is, when impressions get multiple bids, the second price model works really well. It should, in a true market, if price is dictated by demand. When demand is at a representative level, prices should be fair. This is happening when the perfect storm of bids allows it to:

Bids Per Impression

The data above is based on a representative sample of Q2 RTB activity across the supply we tested. In the case of a single impression getting five or more bids in the fraction of a second we collect those bids, the clearing price of that impression will, on the average, be five times higher than an impression that saw just two bids. It’s incredible.

I quote the word “temporary” in the title of this piece because it’s impossible to say just how long this will truly be a problem. Even when we get to the point where the majority, or in the blue-sky scenario 100%, of unsold impressions are cleared by RTB pipes, this problem might still exist. The model only works when there is so much demand for every single impression that bids stack and market prices are actually set by demand in a true auction.

Knowing that every day more demand moves into the RTB ecosystem, prices will become more in line with what publishers expect. Some publishers are patiently waiting for solutions, while others are testing models that effectively turn a second price model into a first price model by dynamic or soft flooring. A need for a solution in advance of balance coming together is critical. Based on the data above, the one suggestion I’ll throw into the air would be that if an impression is truly in a position to be auctioned off in a second price capacity because there exists multiple bids, a true second price auction should occur.

If an impression is not in a position to be auctioned off in a second price capacity because there is only one bid, that impression could be cleared through alternative means while publishers wait for demand to grow. What that alternative means still needs to be determined, but today, in my view, that’s all we should be looking to change.

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