First-price auctions and bid shading

For years many display auctions were second-price. You could bid the most you were willing to pay. If you won, you paid just enough to beat the next bidder, often one cent more. Bidding your true value was safe.

Most programmatic auctions are now first-price. If you bid $8 and you win, you pay $8, even if the next bidder was at $2. That single rule changed how DSPs bid, how publishers set floors, and why “the average bid” stopped matching “the average CPM.”

A small example

An impression is worth about $5 to an advertiser after they account for the chance it converts. Three buyers submit bids:

• Buyer A: $4.00
• Buyer B: $6.50
• Buyer C: $3.25

Buyer B wins in either auction. In a second-price auction, B pays about $4.01. In a first-price auction, B pays $6.50. Same winner, $2.49 difference, and B overpaid relative to the competition.

If B had bid $4.10, B would still have won and paid $4.10. The art is knowing that $4.10 was enough without losing the impression when the competition is higher than history suggested.

What bid shading does

Bid shading is the DSP’s attempt to lower a first-price bid toward the minimum that still wins. The model looks at this publisher, placement, time, and past clearing prices, then submits something below the advertiser’s maximum value and above the likely second bid.

Shade too little and you overpay. Shade too much and you lose impressions you wanted. Shading is not a discount the SSP gives you. It is a lower number the DSP chooses to send.

Where floors fit

A bid floor is the publisher’s minimum. Shading cannot legally or practically clear a floor by bidding under it. If the floor is $5 and the shaded bid is $4, the bid loses even if $4 would have beaten every other buyer.

Hard floors that sit above what buyers will shade toward produce empty slots. Dynamic floors that follow real clearing prices leave room for shading to work. The publisher still gets a price. The buyer still has a reason to bid.

What each side should watch

• Buyers: win rate and the gap between bid and the next-highest price, when the exchange tells you. A win rate near 100% often means you are bidding too high for a first-price room.
• Publishers: fill, clearing CPM, and close-but-lost bids. A floor just above a cluster of shaded bids throws away revenue.
• Both: the auction type in the request (at in OpenRTB). A buyer shading as if the auction were second-price will overpay. A publisher assuming second-price logic will misread the bid.

OpenRTB auction types

• 1 — first price. Winner pays their bid.
• 2 — second price. Winner pays just above the next bid. Rare in open exchange display today.
• 3 — fixed price. The deal price is the price. Common on preferred and programmatic guaranteed deals. Shading does not apply. You take the price or you pass.

Deal types and when the price is fixed are covered in open auction, PMP, preferred, and programmatic guaranteed.

FAQ

Is bid shading the same as a fee?

No. Fees are taken by intermediaries. Shading is the buyer lowering their own offer before the auction starts.

Should publishers turn shading off?

You cannot turn off a buyer’s model. You can set a floor, and you can run a first-price auction honestly so buyers trust the clearing price enough to keep bidding.

Does the winner always pay the bid in a deal?

Only when the deal is first-price. A fixed-price deal charges the agreed CPM. Read the deal, not the open-auction habit.

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