Programmatic Buying and First Price Auctions
The renewed focus on auction pricing, mechanics and transparency in trades and industry events is something worth being aware of, but not an indicator of major market changes. In a recently penned article by YuYu Chen, Digiday brands reporter, and a topic featured at the 2017 Digiday Agency Summit, 1st price auctions vs 2nd price auctions are worth a quick recap, but the renewed focus must also be couched in some realism when looking at programmatic from afar. Primer: 1st-price auctions are those where the highest bidder wins; 2nd-price auctions are those where the price paid is determined by the second highest bidder.
What this means for marketers: Simply put, it’s always important to be aware, but for the most part, brands and marketers should not worry that they’ll miss the entire ad market and ecosystem flipping overnight to either 1st-price or 2nd-price auctions, or anything else (looking at you, header-bidding and blockchain). 2nd-price auctions are currently the heavier used method. As it is now, both 1st and 2nd price auctions, alone, are equally unsustainable, nor are they individually strong enough to completely, or adequately, supply the marketplace. Too much money is involved, and too much would be lost in a complete shift to one or the other.
If only 1st price auctions existed, the law of diminishing returns ensues, and the bottom of the market falls out as bid prices decrease, dollars spent remain flat and inventory flows slow. Relatedly, whether supply is high or low, there is always another party who values the same action/demo/target you do and be willing to exchange more. This is both a fact and typical occurrence in markets and commodities trading. Ultimately either I’ve only paid exactly the amount I wanted to pay, or, paid exactly what the next best offer was. In programmatic, the real skill is in paying the right price for exactly what you wanted; and what’s truly most important – that the purchased media garners a key conversion for our client’s business, moving it forward.