There are two primary types of auctions in Real Time Bidding (RTB) and programmatic advertising. First-price auctions and Second-price auctions.
First-price auctions and second-price auctions are two distinct types of auctions that differ in how the final price paid by the highest bidder is determined. Here's a brief overview of each:
First-price auction:
In a first-price auction, bidders submit sealed bids, and the highest bidder wins the auction. The winner then pays the exact amount of their bid. Since bidders are unaware of what others are bidding, they must strategize and balance their desire to win the auction against the risk of overpaying for the item. This might lead to bidders submitting lower bids than their true valuation to avoid overpaying, a strategy known as bid shading.
Second-price auction:
In a second-price auction, also known as a Vickrey auction, bidders also submit sealed bids, and the highest bidder wins the auction. However, the winner pays the amount of the second-highest bid rather than their own bid. This auction format encourages bidders to submit bids that reflect their true valuation of the item, as they only pay the price of the next highest bid if they win. This mechanism is designed to reduce the winner's curse, which occurs when the winner overpays for an item in a first-price auction.
In summary, the main difference between first-price and second-price auctions is the way the final price is determined. In a first-price auction, the winner pays their own bid, while in a second-price auction, the winner pays the second-highest bid. This difference in pricing mechanisms affects bidders' strategies and the overall efficiency of the auctions.