First-Price vs Second-Price Auction in Ad Tech, Explained
How a second price auction sets the winner and the price, how first price differs, why programmatic switched in 2019, and how search and social auctions work.
In a second price auction, the highest bidder wins but pays the runner-up's bid plus a small increment. In a first-price auction, the winner pays exactly what it bid. Google Ad Manager moved its display and video auctions to first price in 2019, while search and social platforms run auctions where the bid is only one input.
What is a second price auction?
A second price auction is a sealed-bid auction in which the highest bid wins and the winner pays the second-highest bid. Economists call it a Vickrey auction, after William Vickrey, who described it in a 1961 paper.
"Sealed" means no bidder sees the others' bids. Ad exchanges work this way: each buyer submits one blind bid per impression, within milliseconds.
In the textbook model, with one item and bidders who know their own value, bidding your true value is the dominant strategy: no other bid does better, whatever rivals do. Your bid decides whether you win. The runner-up decides what you pay.
Three terms come up in every ad auction:
Clearing price: what the winner actually pays.
Reserve price or price floor: the minimum the seller will accept. Bids below it are ignored.
Increment: the small amount added to the runner-up's bid in ad tech versions, often one cent.
Second price auction example
Take one banner impression on a sports news site, a $1.00 CPM floor and three DSPs bidding (illustrative numbers, not market prices):
| Bidder | Bid (CPM) |
|---|---|
| A | $4.00 |
| B | $3.20 |
| C | $2.50 |
Bidder A wins and pays B's bid plus the increment: $3.21 CPM, $0.79 or about 20% below its own bid. B's bid set A's price; A's bid only decided who won.
Now remove B and C. With no runner-up above the floor, A pays the floor: $1.00 CPM. Without a floor, a lone bidder could buy premium inventory for almost nothing. A second price auction with a reserve price clears at whichever is higher: the runner-up's bid or the reserve.
How a first-price auction works
In a first-price auction the highest bid wins and the winner pays its own bid. With the same three bids, A wins and pays $4.00 CPM.
Now the price is the buyer's problem. A paid $0.79 more than it needed to beat B, and the auction never told A what B had bid. The defence is to bid below true value and accept losing some auctions.
That practice is called bid shading. If A had shaded to $3.30, it would still have beaten B and paid $3.30. At $3.15 it would have lost the impression to B. Good shading finds, for each kind of impression, the lowest bid that still wins often enough.
First-price vs second-price auction: the differences
Both formats pick the highest bid. A second-price winner pays the runner-up's bid, a first-price winner pays its own, and that changes how buyers should bid.
| Second price | First price | |
|---|---|---|
| Who wins | Highest bid | Highest bid |
| Winner pays | Runner-up's bid plus increment, or the floor | Own bid |
| Best bid | True value (in the textbook model) | Below true value (shaded) |
| Overpay risk for buyer | Low | High without shading |
| What sets the price | A rival's bid and any increment | Your own bid |
| Where you meet it today | Google Ads search (a variant with quality factors); OpenRTB requests marked at = 2 | Google Ad Manager display and video since 2019; OpenRTB requests marked at = 1 |
Auction theory says that, under strict assumptions, both formats bring the seller the same expected revenue. In practice the difference shows up on the buyer's side, in how much pricing work each bid needs.
Why programmatic moved to first price
In Google's account, programmatic display moved to first price because one impression could pass through several auctions with different rules.
Header bidding is the background: publishers began collecting bids from several exchanges before their ad server decided, so each exchange's auction became one round of a larger contest. Rubicon Project, one of those exchanges, wrote in its 2018 annual report that some competing exchanges had started submitting first-price bids into header bidding auctions. It made first price its own default for header bidding from January 22, 2018.
Google Ad Manager is the best documented case. On March 6, 2019 Google announced a unified first-price auction in which "the buyer that wins the auction pays the price they bid". Its reason: an ad could go through "a mix of auctions, with different rules", which made inventory hard to value. In May 2019 Google described the old setup as a second-price auction among Authorized Buyers whose winning price then entered a first-price auction against other demand, including header bidding line items. One impression ran under two different rules.
Google's published schedule, as announced at the time:
Week of July 29, 2019: 10% of Authorized Buyers traffic scheduled to move to first price.
Late August to early September 2019: the remaining Authorized Buyers traffic.
From the week of September 9, 2019: the full rollout of the unified first-price auction across Ad Manager, to be completed over the following weeks.
Two details matter for buyers. Google introduced unified pricing rules, one floor applied equally to all non-guaranteed partners, and said floor strategies built around second-price closing prices would no longer be relevant. Google also said Authorized Buyers and Open Bidders would receive the minimum bid that would have won after each auction, the data bid shading runs on.
The change covered display and video sold through Ad Manager, not Google Search, AdSense for Search or YouTube.
For a buyer, the DSP now does the pricing work the auction used to do. Every OpenRTB bid request carries an auction-type field (at: 1 for first price, 2 for second price, the default), so the DSP knows which rule applies and prices the bid to match. The same holds for programmatic in-app inventory: bid manually and you do the shading yourself.
How search and social auctions differ
The textbook name for the search model is the generalized second-price auction (GSP): ads are ranked, and each advertiser pays roughly what it takes to stay above the ad below. Unlike the Vickrey auction, GSP does not make truthful bidding the best strategy.
Google Ads (search). Position is set by Ad Rank, which Google says depends on your bid, the quality of your ads and landing page, Ad Rank thresholds, the competitiveness of the auction, the context of the search, and the expected impact of assets and other ad formats. The highest Ad Rank, not the highest bid, gets the top spot. Google Ads Help states that you pay what is minimally required to clear the Ad Rank thresholds and beat the advertiser directly below you, and the reserve price if nobody is below. You are never charged more than your max CPC, except with automated bidding or bid adjustments. That is the second-price idea, adjusted for quality.
Meta. Meta's ad auction picks the ad with the highest total value, which Meta describes as a combination of the advertiser's bid, the estimated action rate (how likely this person is to take the action you optimize for) and ad quality. Because the bid is only one of the three inputs, the highest bid does not automatically win. For what that means for cost per result, see how much Facebook ads cost.
Bidding strategy: what to do with each type
Start from break-even. Your maximum bid is the payout times the conversion rate. Assume a $200 CPA per first deposit and a 1% click-to-deposit rate: one click is worth $2.00 to you, so a $2.00 CPC is break-even and anything above it loses money.
Second-price auctions. Bid your break-even value per click or impression. A lower bid does not reduce what you pay when you win, because the runner-up sets the price, and it costs you auctions that would have been profitable. Your margin comes from the gap between your bid and the price you actually pay.
First-price auctions. Do not bid your full value. Let the DSP's shading run, or split the same line item across two or three bid levels and compare win rate and cost per result after enough impressions. Floors still apply, so very low bids may never enter the auction.
Search and social. Work on what the platform scores besides the bid: relevance, expected action rate, landing page quality. A stronger ad can hold the same position at a lower price.
FAQ
What is the difference between a first-price auction and a second-price auction?
The difference between a first-price and a second-price auction is what the winner pays. In both, the highest bid wins. In a first-price auction the winner pays its own bid; in a second-price auction it pays the runner-up's bid, often plus a small increment.
What is a sealed auction?
A sealed auction, or sealed-bid auction, is one where each bidder submits a bid without seeing anyone else's. In an open ascending (English) auction, bidders hear rival bids and can raise. Programmatic ad auctions are sealed-bid.
What happens if you are the only bidder?
If you are the only bidder in a second price auction, you usually pay the reserve price or floor, because there is no runner-up bid. If your lone bid is below the floor, the impression goes unsold. Google Ads works the same way on search: with no competitor below you, you pay the reserve price. In a first-price auction you pay your own bid.
What is the best bidding strategy in a second-price auction?
The best bidding strategy in a textbook second-price auction is to bid your true value. Bidding higher risks paying more than the impression is worth, and bidding lower only loses auctions you would have won at an acceptable price.
Is Google Ads a second-price auction?
Google Ads is not a pure second-price auction. Ads are ranked by Ad Rank, which combines the bid with quality and other factors, and the advertiser pays the minimum needed to beat the Ad Rank of the ad below. Google Ad Manager, Google's tool for publishers, has run a first-price auction since 2019.
What is the point of a second-price auction?
The point of a second-price auction is to let bidders state their real value without fear of overpaying, since their own bid only decides whether they win. The item then goes to the bidder who values it most.
Sources
The Journal of Finance, Counterspeculation, Auctions, and Competitive Sealed Tenders (William Vickrey, 1961)
Rubicon Project, Form 10-K for fiscal year 2018 (SEC filing)
Google Authorized Buyers Help, July 2019 release notes: transition to a first-price auction
Google for Developers, Display & Video 360 OpenRTB specification (auction type field
at)Google Ads Help, About Ad Rank
Google Ads Help, Actual cost-per-click (CPC): Definition
