September 6, 2017
How We Are Rolling Out The First Transparent First-Price Auction
By: Krushna Merchant, Senior Product Manager and Ron Taur, Senior Product Manager
Supply path optimisation. Auction mechanics. First-price auctions. These phrases have been tossed around a lot in recent months yet there’s still confusion around what they mean and how buyers and sellers should respond to industry changes.
Working closely with our publisher and demand partners, and through our own research, we found that several major SSPs are deploying “shadow first-price” auctions – second-price auctions that behave like first-price auctions. In some instances, SSPs have switched entirely to first-price mechanics without letting DSPs know, preventing DSPs and the users of DSP platforms from optimising their bidding strategy, while maximising their own gain at the expense of everyone else.
First-price auctions are not inherently bad but have been quietly introduced by some SSPs in such a way that negatively disrupts DSPs’ ability to bid intelligently. This ultimately threatens the entire supply chain and is not the right approach for our industry.
For a healthy marketplace to thrive, both the buyer and the seller must be treated fairly. That is why we’ve designed an honest and transparent first-price auction – the first and only one in the market to date.
What We’re Doing Differently
Auction Transparency – We are providing clarity into the auction type and whether it’s beneficial or necessary to run a first-price auction so that DSPs can adjust their bidding strategies accordingly.
By leveraging these two OpenRTB standard parameters in the bid request, DSPs can bid more intelligently:
- The Auction Type parameter will indicate if OpenX will run a first-price auction (at=1) or a second-price auction (at=2)
- The Final Decision parameter will indicate when OpenX closes an auction and serves an ad (fd=0) or when OpenX closes an auction but then passes that auction result to a publisher or container solution (fd=1)
Collaborative Approach – Instead of flipping a switch and hoping no one would notice, we communicated this change with DSPs well before launch and developed a progressive ramp-up plan to give them time to adjust their algorithms. During this ramp-up period, we will simultaneously run a first-price and second-price auction to help DSPs optimize bidding behavior in these new and different environments. Doing so allows DSPs to move from second-price to first-price bidding at their own speed without being disadvantaged in winning the auction. It also gives publishers time to understand the impact on their CPMs and overall revenue, as well as provide deeper insight into how buyers truly value their inventory and users.
Pulling this off required major changes to our foundational architecture. Because we have always run second-price auctions, introducing a first-price bid and simultaneously running a second-price auction with a first-price auction for the same request required an intricate technical redesign. A change this large permeates throughout the core of the ad delivery process. Every potential use case needed to be accounted for and properly tested, and every downstream service after ad serving (including data, reporting, monitoring, accounting, etc.) would need to be properly modified to handle first-price auctions.
Ultimately, our decision to invest deeply in this design was based on the opportunity we saw to help our partners navigate a changing auction landscape. We are committed to putting partner’s needs above all else. DSPs will now be able to access the insights they need to make smart decisions going forward. This will put everyone on the right path for the future where we envision first-price and second-price auctions coexisting.
Planning for the Future – Recognizing that auction mechanics are undergoing an important evolution, we’re proud to release a fair and transparent auction solution that empowers both marketers and publishers.
As we navigate this new era of programmatic, it’s important to remember the promise of marketplaces — bringing buyers and sellers together to identify fair market value. Marketplaces should not dictate prices or favour one side over another. The most effective and successful programmatic marketplaces maximise ROI for all sides and operate transparently. At OpenX we are innovating and investing not for short term gains but for the long term health of our industry.