RTB: What's the difference between first and second price?

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Traditionally, in the RTB programmatic advertising sector (as on Ebay), auctions have been organized according to the second-price model. This means that the advertiser with the highest bid wins the auction, but at the price set by the second highest bidder, plus a variable margin. This is always an advantage over the price that the highest bidder would have agreed to pay, but the real price of the inventory, inflated by the intermediaries' commissions, remains unclear.

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RTB: First vs. second price

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On his blog, Maciej Zawadziński (CEO of Clearcode) clearly explains the difference between first-price and second-price bidding. Here's an illustration (taken from Clearcode's blog) that sums up the difference.

The second-price auction mechanism ensures that the most generous bidder does not overpay for the coveted space in relation to the market price assessed by the group of bidders. That said, if the most generous bidder bids too high, intermediaries will tend to charge him commission. This will always give him the impression of having made a good deal in relation to the expenses he had set aside.

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A penchant for first-price RTB...

Due in part to the opacity and excesses observed in the jungle of intermediaries, the ecosystem today seems to be moving towards first-price bidding. Where the highest bid determines the price paid for a given space. Possibly increased by a commission, which should remain moderate, as it is added in complete transparency. Publishers are delighted with this development, as they were often the first to suffer from the opaque commissioning of intermediaries. Advertisers, on the other hand, risk having to pay more for available space. At the same time, they will have to assess the value of the inventory to avoid offering an excessive price.

First-price bidding has recently gained in popularity with the deployment of header bidding and S2S bidding. Header bidding is an auction via a script inserted in the header of a page, for each impression, in a matter of milliseconds. S2S bidding, also known as server-side header bidding, uses the same principle, but from server to server, to avoid overloading the browser during the bidding process. It's worth noting that while header bidding uses first-price bidding, it often inherits the results of second-price bidding by ad exchanges, returning their respective winners to the header, with the highest bidder from this primary bidding paying a lower price than his initial bid.

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This allows publishers to optimize their revenue per impression, while allowing ad exchanges to moderate market prices through second-price bidding on their respective platforms. If the ecosystem continues to demand greater transparency, we'll no doubt see a move towards harmonization of the first-price principle throughout the chain. To be continued...

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