First Price vs Second Price Auctions – Which is Better for Publishers?

If you’ve been in the programmatic advertising game for a while, you’ve probably heard of “first price” and “second price” auctions. But what do they really mean for you, and why should you care?

Advertisers are constantly competing for your ad space. The big question is: how much do they pay when they win? That’s where the difference between first and second price auctions comes in—and it can have a big impact on your revenue. Whether the winning advertiser pays their full bid or just a bit more than the second-highest bid can change how much you make for each ad impression.

In this blog, we’ll break down how these two auction types work, why the industry has shifted toward first price auctions, and how you can use strategies like setting up price floors to get the most out of your ad inventory.

What Is an Auction in Programmatic Advertising?

Think of an auction as a fast-paced bidding war, but instead of bidding on physical goods, advertisers are competing for ad space on your website. Every time someone visits your site, an auction is triggered, where multiple advertisers place bids to show their ad to that visitor. The highest bidder wins, and their ad gets displayed.

These auctions happen in real-time, and everything is automated—no human intervention needed. It all takes place in the milliseconds it takes for your page to load. And while this may sound complex, as a publisher, what you really need to understand is how the auction type impacts the price of the winning bid and, ultimately, your revenue.

There are two main types of auctions used in programmatic advertising: first price and second-price auctions. Both models decide which ad gets shown based on bidding, but they handle the winning price in very different ways. Understanding these differences is crucial for maximizing your earnings as a publisher.

Want to dive deeper into how programmatic advertising works? Check out our complete guide to programmatic advertising.

Understanding the First Price Auction

A first price auction is exactly what it sounds like—the advertiser who places the highest bid wins the auction and pays the amount they bid. It’s a straightforward approach where the winning bidder doesn’t get any discounts or reductions; they pay their full bid price.

How First Price Auctions Work:

1. Advertisers bid for an impression on your site.
2. The highest bidder wins the auction.
3. The winning advertiser pays the exact amount they bid.

For example, if an advertiser bids $5 and wins, they’ll pay the full $5 for that ad impression. This might seem simple, but it introduces an interesting dynamic for advertisers: they must be very strategic about how much they bid. If they bid too high, they risk overpaying, but if they bid too low, they lose the auction altogether.

What Impact do First Price Auctions have on Publishers?

As a publisher, first price auctions offer a clearer sense of what your ad inventory is worth because the winning bid is exactly what you get paid. There's no mystery about discounts or bid reductions, which can lead to more consistent revenue. However, it's important to note that advertisers tend to bid cautiously in first price auctions to avoid overpaying, which could sometimes result in lower overall bids compared to second-price auctions.

Understanding the Second Price Auction

In a second price auction, things work a bit differently. The highest bidder still wins the auction, but instead of paying their full bid amount, they only pay slightly more than the second-highest bid. This creates a situation where the winner gets a bit of a discount, as they don't pay their maximum bid.

How Second Price Auctions Work:

1. Advertisers bid for an impression on your site.
2. The highest bidder wins, just like in a first price auction.
3. Instead of paying their bid, the winner pays the second-highest bid price plus a small increment.

For example, if the highest bid is $20.00 and the second-highest bid is $15.00, the winner will pay just above $15.00, rather than the full $20.00. This auction model encourages advertisers to bid closer to their true maximum because they know they won't have to pay their full amount if they win.

What Impact do Second Price Auctions have on Publishers?

From a publisher’s perspective, second-price auctions often lead to higher bids from advertisers, as they know they might not end up paying their full bid. However, the downside is that you may not receive the full value of the highest bid. If a $20.00 bid wins, you might only receive $15.01 for that impression, which can sometimes result in less revenue compared to a first price auction.

While second-price auctions used to dominate programmatic advertising, the industry has been shifting toward first-price auctions in recent years. In the next section, we’ll explore why this shift is happening and what it means for you as a publisher.

First Price vs Second Price Auctions: Key Differences

While both first-price and second-price auctions are designed to help determine which advertiser’s ad gets shown, they approach pricing very differently. Understanding these differences is crucial for publishers who want to maximize their ad revenue.

Core Differences:

Which Auction Type Is Better for Publishers?

The best auction type for publishers depends on your priorities.

• First Price Auctions: Offer more transparency and predictability. You know exactly what the highest bidder will pay, which can make revenue forecasting simpler. However, advertisers tend to bid cautiously to avoid overpaying, which can sometimes result in lower bids.
• Second Price Auctions: Encourage more aggressive bidding since advertisers know they won’t have to pay their full bid if they win. While this can drive up competition and result in higher bids, the revenue you receive may be lower than the highest bid due to the nature of the pricing model.

In addition to choosing between auction types, you also have tools at your disposal to maintain price control and manage yield—especially if you’re working with the right ad technology, like AdEngine, and an experienced Ad Ops team. For example, you can set a price floor, which is the minimum amount an advertiser must bid to win an auction. By adjusting and experimenting with price floors, you can boost your revenue.

Ultimately, the choice between first price and second price auctions comes down to your goals. If you value transparency and predictable revenue, first price auctions might be the way to go. But if you’re comfortable with more variable outcomes and want to encourage higher bids, second price auctions could be worth considering. Both models have their benefits, and the right choice depends on your specific ad inventory and strategy.

Why Did the Industry Move Toward First Price Auctions?

In recent years, the programmatic advertising landscape has shifted dramatically, with more ad exchanges and publishers adopting first-price auctions. But why the move away from second-price auctions, which used to be the industry standard?

1. Increased Transparency

One of the main reasons for the shift toward first-price auctions is the demand for greater transparency. In second-price auctions, the actual price paid by the winning bidder often felt unclear to both advertisers and publishers. Advertisers could win an auction with a high bid but end up paying significantly less, which made it harder for publishers to predict their revenue and for advertisers to trust the system.

First-price auctions, on the other hand, provide a straightforward, transparent process. Advertisers know exactly what they’ll pay, and publishers know exactly what they’ll receive. This transparency helps build trust between buyers and sellers in the ecosystem.

2. Bid Manipulation in Second Price Auctions

Second price auctions opened the door to certain types of bid manipulation. For example, some ad exchanges and demand-side platforms (DSPs) used bid shading strategies to manipulate the final price, often lowering it to benefit the buyer without the publisher’s knowledge. This caused frustration among publishers who felt they weren’t getting the full value of their inventory.

With first-price auctions, these manipulations are less common because the price paid is the exact bid submitted by the advertiser, eliminating the room for shady practices.

3. Advertiser Demand for Control

Advertisers also played a significant role in pushing for first-price auctions. In second-price auctions, they often felt like they didn’t have enough control over the final price they paid. Even though they bid high, they could end up paying much less, which sounds great in theory but often led to inefficient header bidding strategies and unpredictable results.

First-price auctions give advertisers more control, allowing them to set a price that they are comfortable with and ensuring that this price is the one they pay if they win. This predictability led to more advertiser confidence in the auction process.

4. Programmatic Ecosystem Evolution

As the programmatic ecosystem matured, more sophisticated technologies and tools made it easier for advertisers to manage their header bidding strategies. The shift toward first-price auctions aligns with this evolution, giving advertisers more power to decide how they want to bid and pay, while also giving publishers more predictable revenue streams.

In summary, the industry’s move to first-price auctions is driven by a need for transparency, reducing manipulation, and giving both advertisers and publishers more control. The shift doesn’t mean second-price auctions are gone, but it highlights the importance of clear pricing models in today’s advertising world.

How Does Bid Shading Fit In?

As first price auctions became more common, a new strategy emerged to help advertisers manage their costs—bid shading. But what exactly is bid shading, and how does it impact the auction process for publishers?

What Is Bid Shading?

With the shift to first price auctions, bid shading has become an important strategy to help advertisers manage costs. In a first price auction, the winning bidder typically pays the full amount they bid, but bid shading allows them to pay slightly less—somewhere between the highest bid and what would have been the second-highest bid.

Why Does Bid Shading Matter?

For publishers, bid shading can result in slightly lower final prices than a pure first price auction. For example, instead of paying the full €5 bid, an advertiser might pay €4.70 due to bid shading. While this can mean a small reduction in revenue for publishers, the benefit is that bid shading encourages advertisers to continue placing higher bids, knowing they won’t always pay their full bid. This helps maintain a healthy level of competition in the auctions.

Although publishers might see slightly reduced payouts per ad impression, bid shading helps advertisers feel more comfortable with first price auctions, which keeps them competitive and willing to bid higher overall. Over time, this creates a more sustainable and balanced auction environment for both parties.

If you want to explore more about how bid shading works, check out our in-depth guide on bid shading.

Unsure About How to Optimize Your Auction Setup?

Whether you’re navigating first price vs second price auctions, adjusting price floors, or managing bid shading, getting the balance right can be a challenge. At Snigel, we specialize in optimizing these setups for publishers, helping you maximize revenue while maintaining control over your ad strategy. With our hands-on approach, we work as an extension of your team, ensuring every aspect of your ad inventory is fine-tuned for success. Get in touch with us to learn more about how we can help.