Key Takeaways

• In first-price auctions, the winner pays exactly what they bid

• In second-price auctions, the winner pays $0.01 more than the second-highest bid

• The industry has largely shifted to first-price auctions since 2019

• First-price auctions provide more transparency but require sophisticated bidding strategies

• Second-price auctions can be more advertiser-friendly but create pricing uncertainty

The Auction Models Explained

If you've been around programmatic advertising for a while, you've probably heard the terms "first-price" and "second-price" thrown around during meetings. But what exactly are they, and why should you care? Let's break it down.

First-Price Auctions: Pay What You Bid

In a first-price auction, it's pretty straightforward - the highest bidder wins the impression and pays exactly what they bid. If Advertiser A bids $3.50 CPM and that's the highest bid, they win and pay $3.50. Simple.

This model has become the dominant standard in programmatic advertising since Google Ad Manager made the switch in 2019. The reason? Transparency and simplicity. There's no mystery about what you'll pay if you win.

Second-Price Auctions: A Discount for Winners

Second-price auctions work differently. The highest bidder still wins, but they only pay $0.01 more than the second-highest bid.

For example:

• Advertiser A bids $3.50 CPM

• Advertiser B bids $2.75 CPM

• Advertiser A wins but only pays $2.76 CPM

This model was actually the original standard in programmatic, popularized by Google's AdWords (now Google Ads) and early ad exchanges. The logic was that it would encourage advertisers to bid their true maximum value since they'd likely end up paying less anyway.

The Great Shift: Why First-Price Took Over

Around 2017-2019, a major shift occured in the industry. Ad exchanges started moving from second-price to first-price auctions. By March 2019, Google Ad Manager (the largest ad server) announced its complete transition to first-price auctions.

Why the change? A few reasons:

1. Header Bidding Changed the Game

With the rise of header bidding (where multiple SSPs compete simultaneously), the waterfall model broke down. Publishers realized that in a multi-SSP environment, second-price auctions could lead to revenue loss.

If SSP A ran a second-price auction that resulted in a $2.76 winning bid, but SSP B had a first-price auction with a $3.00 bid, the publisher would lose money by going with SSP A, even if the original high bid there was $3.50!

2. Transparency Became King

Advertisers increasingly demanded clarity about how their money was being spent. In a first-price auction, what you bid is what you pay, no more questioning whether the "second price" was legitimate or manipulated.

3. Bid Shading Emerged as a Solution

Smart DSPs developed "bid shading" algorithms to help advertisers avoid overpaying in first-price environments. These tools analyze historical auction data to suggest optimal bid prices that are somewhere between second-price and first-price levels.

Pros and Cons: Which Model is Better?

Like everything in ad tech, it depends on your perspective.

From the Publisher's View

First-Price Advantages:

• Generally higher revenue (advertisers pay their full bid)

• Clearer auction dynamics

• Better compatibility with header bidding

Second-Price Advantages:

• Encouraged higher initial bids from advertisers

• Less likelihood of "bid shading" strategies

From the Advertiser's View

First-Price Advantages:

• Complete transparency on what you'll pay

• No "black box" auction dynamics

• More predictable win rates

Second-Price Advantages:

• Protection from overpaying (you only pay slightly more than the next highest bid)

• Less need for sophisticated bidding strategies

• Often lower actual costs for the same inventory

The Current State of Programmatic Auctions

As of 2024, first-price auctions dominate the landscape. Almost all major SSPs and exchanges, including Google Ad Manager, operate exclusively on first-price auction models.

However, there are a few notable exceptions:

1. Google Ads still uses a form of second-price auction for search ads

2. Some private marketplace (PMP) deals still negotiate second-price terms

3. A few niche ad exchanges maintain second-price options for specific formats

How to Succeed in Today's First-Price World

If you're a publisher:

• Make sure your price floors are properly set, as they're more important than ever

• Consider using dynamic floors that adjust based on historical data

• Be transparent with advertisers about your auction mechanics

If you're an advertiser:

• Invest in DSPs with strong bid shading capabilities

• Analyze your win rates and CPMs regularly to optimize bidding strategies

• Consider testing different bid levels to find the sweet spot for your campaigns

The Future of Auction Dynamics

While first-price auctions appear firmly established, the ad tech ecosystem never stands still. Some experts predict we might see:

• More sophisticated hybrid auction models

• Machine learning-powered dynamic auction types that adapt based on inventory type

• New auction formats designed specifically for emerging ad formats like CTV and audio