Understanding Auction Dynamics
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29 March 2023
Have you ever wondered what programmatic advertising is based upon? The answer is auction dynamics and bidding! We at DecenterAds are keenly aware of the importance of understanding how the process of buying and selling ad inventory works. And as industry experts, we wanna share this knowledge so that you also know how different auction models used in programmatic advertising can impact the advertising landscape. Sit tight and let’s get started!
Programmatic advertising auction dynamics
Auction dynamics refer to the rules and processes that govern the buying and selling of advertising space in programmatic advertising. And yeah – they play a crucial role in the industry, as the auction model used can greatly impact the efficiency and cost-effectiveness of the process, as well as the level of transparency and predictability for both buyers and sellers.
Types of auction dynamics
Different auctions mean different bidding processes. So let’s take a look at the two most common auction types used in programmatic advertising and their features.
In Second-Price Auction (2PA), the highest bidder wins the auction, but they only pay the second-highest bid. This creates an incentive for bidders to bid their true value for the advertising space, rather than overbidding to ensure they win the auction.
There are also First-Price Auctions (1PA) in which the highest bidder wins the auction and pays their bid amount. This type of auction can lead to higher prices for the seller, but it can also create a more competitive bidding environment.
Both first-price and second-price auctions have their own advantages and disadvantages and the choice of which to use can depend on the specific needs and goals of the programmatic platform. For example, First-Price Auctions are better for prioritizing transparency and predictability for bidders, which can be beneficial for advertisers who want to have more control over their ad spend and for publishers looking to maximize revenue from their ad inventory. On the other hand, Second-Price Auctions are better for prioritizing efficiency and cost-effectiveness, which can be beneficial for advertisers looking to get the best value for their ad spend, and for publishers looking to fill their inventory with the highest possible number of bids.
Price floors in auctions
Price floors (or floor prices – potato potahto) are the minimum price a publisher is willing to accept for an ad impression. Two types of floor prices are commonly used in programmatic advertising: hard and soft floors.
A Hard Price Floor (HPF) is a fixed price that all bidders must exceed to participate in the auction. If a bidder’s bid is lower than the hard floor, their bid will be rejected and they will not be able to participate in the auction. Hard floors are typically set by the platform or the seller, and they are used to ensure that the seller receives a certain minimum price for their ad inventory.
A Soft Price Floor (SPF), alternatively, is a suggested minimum bid rather than a fixed price. Bidders can place bids below the soft floor, yet they may be less likely to win the auction. If the soft floor is set by the platform, the platform may also consider other factors when determining the winner of the auction, such as the relevance of the ad and the quality of the landing page, in addition to the bid amount. In some cases, the platform may adjust the soft floor dynamically based on the number of bidders and the bid amount and could lower the floor if there are not many bidders and the bid amount is below the floor.
It’s worth mentioning that even if a bidder wins an auction with a bid below the soft floor, they pay the soft floor price anyway. This ensures that the seller receives a certain minimum price for their ad inventory.
Hard floors are considered more strict than soft floors, as they limit the number of bidders who can participate in the auction, and also the price will be more predictable for the seller. Soft floors are considered more flexible, as they allow for more bidders to participate in the auction and may lead to a more competitive bidding environment.
We hope this piece has helped you gain a better understanding of auction dynamics in programmatic advertising. If you have any further questions about auctions or the bidding process, make sure to shoot a message to our support! And stay tuned for the next articles on the DecenterAds blog as we dive deeper into the programmatic ad ecosystem.
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