The complexity of supply and demand in the programmatic advertising industry has led to a greater need for transparency and control. During the early days of the programmatic approach, the tag-based waterfall method defined the entire ad exchange landscape and set clear expectations for buyers and publishers alike.

Before wrappers and header bidding took over the entirety of the programmatic advertising industry, the second-price auction model was the dominant method to determine the price of the winning bid. It complimented the waterfall method perfectly as it guaranteed a win for the SSP that matched the publisher’s floor price and ensured buyer happiness by closing the price gap.

However, that was all to change when publishers began using wrappers to add additional SSPs in order to increase their revenue. Second-price auctions suddenly became insufficient and the SSPs that still relied on the now outdated auction model began falling behind. This article will explain why a shift in auction models occurred and what that means for the future of ad exchange.

First-price and second-price models

At the most basic level, auction models define how much the auction winner needs to pay. In the first-price model, the winner pays the exact amount that they bid on an impression. In contrast, the winner of an auction relying on the second-price model pays just one cent above the second-highest bid.

The second-price model allowed buyers to bid as much money as they felt was necessary to win without actually paying the proposed bid amount when they won. They could rely on the market to define the end price of an impression and keep the remaining bid, discounting programmatic advertising fees.

The limitations of the second-price model weren’t all that obvious until the emergence of wrappers and aggregation of bids from multiple SSPs. That’s when a need for change became more obvious.

The shift to the first-price auction model

For the longest time, second-price auctions dominated the ad exchange space. Both buyers and publishers considered the second-price model to be efficient and fair to an extent.

However, with the rise of wrappers and header bidding, SSPs were pitted against one another. There were no more guaranteed wins for a single buyer who bid higher than the floor price of an impression. In this situation, running a second-price auction would put an SSP at a disadvantage, as the auction would result in a bid that’s lower than an SSP operating with the first-price model.

All of this revealed that the second-price auction model was neither efficient nor fully transparent: SSPs could hide the fees they were charging to both parties, there were inconsistencies in the form of modified second-price auctions, and publishers had no idea what the best offer on the table was.

SSPs were known to engage in first-price auctions in order to win in a highly competitive header bidding environment without disclosing it. Switching to the first-price model was the only way that SSPs could deliver a winning bid without engaging in underhanded strategies.

For buyers, the shift to the first-price model meant that they could finally offer a realistic price per impression. Publishers saw an incremental growth of their revenue by adding more SSPs to their wrapper.

Header bidding also paved the way for a more fair and transparent ad exchange landscape where it’s much easier to recognize the real value of a bid.

MGID auction mechanics

At MGID, we integrate direct and programmatic demand into our auction mechanics, ensuring a 100% fill rate for publishers on our platform. In fact, our auction mechanics and demand integration directly translate into high competition auctions that yield the best results for our publishers.

In addition, we use a first-price auction model for the utmost transparency and fairness — the pillars of programmatic advertising.

To ensure the right pricing structure, we rely on dynamic floors. They are predictions of what an impression is worth to a buyer and are adjusted programmatically. We use data from publishers and buyers to forecast a realistic bid density that allows us to dynamically set the right floor price.

We also strive to offer the most valuable service to our advertisers. By allowing them to choose between private marketplace deals (PMPs) and open market deals, advertisers have full control over the inventory they’re bidding for. Some advertisers prefer working with certain publishers over others, so we make it convenient for them to make select bids.

Final thoughts

It was only a matter of time before first-price auctions replaced the outdated and faulty second-price model. The same goes for the waterfall method, which was long overdue for a rework. It was hardly fair or profitable, but it took a whole new approach to programmatic advertising to shine a light on all the issues of the waterfall system.

The first-price model has the capacity to create a much brighter future for publishers, advertisers and the entire industry.