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Why go for first-price auctions?

By Sandrine Tessier,
Content Strategist
April 16th 2018

What is a first-price auction?

A first-price auction is a programmatic auction that will be cleared at the highest bid. In a second-price model, the auction would be won by the highest bidder, but cleared at the second highest price plus a one cent increment. Here is an example of how first-price and second-price auctions work:

Learn more about first and second-price auctions.

Why is district m moving to a first-price model?

Header bidding is becoming increasingly competitive and by now, first-price models have been widely adopted by the major players in the industry. Besides the competitive state of header bidding, by moving towards a first-price model, publishers stand a chance to get the true value of their impressions. On the flip side, advertisers get more transparency into the price they ultimately end up paying, as with second-price auctions, there’s no guarantee a buyer ends up paying a true second price as soft floors could be used in various ways and purposes.

How have we implemented the new model?

The process started in Q4-17 after we spoke with our buyers and sellers to inform them of the upcoming switch. To ensure a smooth transition, we started by testing out our first-price auction with 20 publishers. With successful results being observed, we moved on to 20% of our publishers in January 2018 and then rolled out gradually to 100% first-price at the end of Q1-18.

We made sure to send signals to buyers at the auction level to describe the type of auction the buyer is getting into. This allows DSPs to process that information in real-time and adjust their bids accordingly.

This progressive and transparent implementation ensured that the transition was yielding optimal results for both buyers and publishers and that any bugs would be fixed before full implementation.

How will it benefit both publishers and advertisers?

The advantages of first-price auctions are pretty obvious for publishers. In an RTB first-price auction, publishers get the best value out of their inventory since the winning bid will always be the highest price, no matter the price of the second bid.

The main concern that surrounded second-price bidding was the lack of transparency, yet first-price auction brings a solution to this issue by removing the soft floor mechanism, which will compel advertisers to bid the true price they are willing to pay for the ad space.

Of course, this means advertisers will need to adjust their bidding strategy, using tactics such as bid shading. What is bid shading? It is a process where advertisers will simultaneously decrease their bids and observe their win rate to get to that sweet spot where they can pay the true value of an impression for their own KPI goals.

This shift implies that advertisers have to become more agile and flexible in their bidding strategy, but overall, the first-price model does create a true unified auction as everyone competes with the same rules, thanks to the removal of the soft floor mechanism.

Why does the industry need to shift towards first-price?

First and foremost, the main reason for the industry shifting to first-price auctions is to rebalance the auction dynamics and even the playing field for all players. Right now, with the two models running, second-price users are increasingly losing, which benefits no one.

Consider that if you have 8 bidders for an ad space where one runs on first-price and the 7 others, on second-price, the first-price bidder is more likely to win.

Besides the competitive aspect of it, first-price auctions also promises to bring a much-needed transparency to the programmatic landscape: due to the fact that first-price auctions do not use a soft floor mechanism, buyers get a fair competition and more transparency on the auction dynamics.

If you want to learn more about district m’s RTB auction mechanism, contact our support team today!

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