Starting this week, the price paid by winning bidders in Ad Manager auctions will be calculated differently. Google Ad Manager is moving to a first price auction method.

Some fear this will cause a price hike for online ads.

Google signalled the change in March. They say that months of trials have proven that ‘first price auctions have a neutral to positive impact on a publisher’s total revenue’.

So, that’s publishers happy. But, what will it mean for advertisers?

Who's on first, What's on second

Google previously maintained that second-price auctions were the method that best reflected the value of publisher inventory.

In second price auctions, everyone secretly submits bids. Whoever bids the highest wins the auction. But, the winner only has to pay a price equal to the second highest bid.

It’s theoretically simple. But, as the online ad ecosystem evolved, things got tricky.

In practice, a single bid went through multiple auctions, sometimes with different rules, trying to buy its way to ad space. Some agents tried to game the system. Many users begged for better transparency.

In early 2019, Google announced it was looking at first-price auctions as a way to ‘reduce complexity and create a fair and transparent market for everyone.’

Examples, expenses & equivalence

First price auctions work similarly to second price ones, except that the winning bidder pays the amount they themselves actually bid.

Consider a hypothetical auction with only two bidders. Marketer A bids $6. Marketer B bids $7.
Under second price auction rules, Marketer B is the winner and they pay $6.
Under first price auction rules, Marketer B still wins, but they pay $7.

Regardless of the auction type, the same bidder wins. But, the amount paid for the win is calculated differently.

So, it might seem like first price auctions will result in advertisers paying more. But, that’s not necessarily so. Why? Advertisers will learn to bid differently.

This is supported by a math concept called the Revenue-Equivalence Theorem. It says that first and second price auctions should expect the same revenue, and each bidder can expect to make the same payment. If you’ve got a beautiful mind, wrap it around the wiki explanation.

We are yet to see if online ad practice stacks up to economic theory.

Advertisers must adapt

For years, marketers have grown accustomed to second price auctions. A switch may temporarily disadvantage them while they and the platforms they use adapt to a first-price mode of operation.

Back in March, Google Product Manager Sam Cox promised to give buyers and sellers a ‘few months’ to ‘make changes in their programmatic strategies’.

Well, the months have passed. The time has come. Are you ready?

Is this switch by Google going to hit your bottom line? Have you got a plan in place to make the best of it?

Copy Transmission is a Melbourne-based agency :: Better Brands. Loud & Clear.