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Auction Pricing Models

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With Koddi Ads, publishers can choose to implement either of the two main auction pricing models to their ad-program: a first-price or a second-price auction.

Auction Pricing Models

First price auction - A model wherein the buyer pays exactly the price they’ve bid on any given advertising click. The winning bid is also known as the clearing price.

Second-price auction - A model wherein the buyer pays $0.01 more than the second highest bid for a click.

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Example

Three bidders participate in the auction. Each of the bidders set a price of how much they are going to pay for a click:

Bidder A = $1.25
Bidder B= $1
Bidder C = $0.75
Minimum Bid for the program = $0.5

What will be each bidder's cost in case a user clicks on their ad?

In the case of a first-price auction, the CPC will be the same as the bid ($1.25, $1, and $0.75).
In the case of a second price auction, the CPC will be $0.01 + next-highest bid:
Bidder A = $1.01
Bidder B= $0.76
Bidder C = $0.50

We can see on the example above that marketplaces' income would be higher in the case of a first-price auction (stronger average CPC). However this example does not take into account bid shading : advertisers naturally decrease their bid in the case of a first price auction, in order to prevent risks of CPC inflation.

On the other hand, if there is not sufficient demand on a program, a second-price auction would naturally decrease the overall cost. Publishers can combat the general reduction of bids by increasing the closing price of their auctions.

Advantages of First-Price Auctions

  • Reduces complexity in the ad tech environment
  • Advertisers often perceive it as more transparent than a second price auction with a dynamic price floor
  • Ensures publishers receive a fair value for their inventory in case of limited competition (higher CPC)
  • Does not require dynamic floor-price technology

Advantages of Second-Price Auctions

  • Reduces risks and CPC inflation for advertisers
  • Facilitates advertisers' program adoption, and go-to-market
  • Publishers can control program-wide CPC through dynamic floor-price technology (minimum bid automatically changes based on advertiser demand)
  • Allows advertisers to bid more aggressively, ultimately driving up prices in the auction if there is sufficient competition among bidders.

Updated over 2 years ago