Bid Shading

William Chen

What is Bid Shading?

Not to be confused with bid caching, bid shading is a compromise between the first and second-price auction systems in which the winner of an auction will pay an amount between what they would have paid in the first and second-price auctions. Bid shading was initially introduced in order to reach a middle ground for buyers that did no like the first price auctions, as they would inevitably pay more under this pricing model.

First-Price Auction

The winner of the auction will pay exactly what they bid. If the winner bids $3.00, the buyer pays $3.00.

Second-Price Auction

The winner of the auction pays a penny more than the second highest bid in the auction. If the winner bids $3.00, but the second highest bid was $2.00, the winner would pay $2.01.

Bid Shading

The winner of the auction pays an amount between the first and second-price auction. If the winner bids $3.00 and the second highest bid is $2.00, the winner would pay an amount anywhere between $2.01 and $3.00.

Bid shading is currently offered by SSPs as a free service. DSPs are switching towards bid shading as a way to avoid first price auctions and minimize costs. However, vendors may start charging fees for buyers to use the bid shading service, a move that buyers are not looking forward to.

Auction Pricing Models at a Glance

According to a report by eMarketer, first-price auction adoption by vendors has spiked a staggering 37.5% in just 3 months. This spike has definitely made an impact on the push towards bid shading.

Why the Shift to First-Price Auctions?

  • The shift towards transparency. With a second price auction, there is room for vendors to take a cut of the winning bid. With first price auctions, buyers know that they will be charged exactly what they bid, and there is no excess change to skim off the top.
  • SSPs have implemented various alternative second price auction strategies, dynamic floors, and other variations of a standard second price auction. The move to a first price auction creates a more consistent buying structure for the industry.
  • Header bidding. More than half of the major publishers are now using header bidding. Within header bidding, the publishers are forcing the buyers to transact in effectively a first price auction environment by squeezing bids into bid buckets as small as 1 cent.

How does Bid Shading Work?

  • SSPs will base the final bid shading price on several factors:
    • Bid rates
    • Publisher/web page
    • Winning bid prices
    • Losing bid prices
    • Placement on the page

The Publisher Perspective

Although bid shading does reduce publisher payout as compared to a first price auction, publishers still maintain more revenue as compared to a second price auction. A benefit for publishers is that they will see a more consistent revenue stream, as buyers will be more inclined to bid their true value amount of the impression with bid shading. Compare this to a first price auction where buyers may bid less than what they value the impression in hopes that they will score the impression for cheaper.

A Word of Caution for Buyers

By utilizing the bid shading technology, buyers must inherently trust their vendors. Currently there is no way to measure and make sure that the SSPs are not taking an extra cut for themselves. In the $3.00 and $2.00 bid example, a correct price with bid shading may be $2.50, but the SSP may inflate this number to $2.75 and take home the extra $0.25. In order to provide full transparency (what our industry has been trying to achieve), SSPs can consider providing the calculation methods for their final bid shading prices to buyers.

Sources

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Published by William Chen

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