How Index Exchange Switched to First-Price Auctions

Programmatic platforms are making big changes to how they price their ad auctions. And it’s arguable that no company more significantly overhauled its pricing structure than Index Exchange, a programmatic platform publishers use to sell their inventory.

Back in September, Index Exchange ran all of its header bidding integrations through second-price auctions, which is how programmatic auctions have historically operated. In a second-price auction, the second-highest bid determines the amount of money the auction winner will pay. Second-price auctioning was easier to navigate before header bidding came along and allowed multiple platforms to simultaneously bid on the same inventory. As header bidding became more popular, several programmatic platforms, including AppNexus, OpenX, Rubicon Project, PubMatic and Index Exchange, began testing first-price auctions.

Since September, Index Exchange has been incrementally moving its publisher clients over to first-price auctions, in which the highest bid determines what the winner pays. The company moved four publishers over, then eight, and so on, with all the publishers it works with moving to first-price by March, according to Will Doherty, Index Exchange's vice president of business development.

Each time Index Exchange moved a batch of publishers to first-price, it notified all of the demand-side platforms (DSPs) bidding on that publisher's inventory that the shift was happening. It then waited a few weeks before moving more publishers to first-price, so that it could analyze the data to make sure the change didn’t set off any bugs. Rather than hoping DSPs would pick up on the pricing shift by detecting changes in the data found in bid requests, Index Exchange separately notified its DSP partners because it isn’t always clear from the sell-side if DSPs have visibility into auction pricing.

“We did it in a very controlled way, just so that buyers had all the clarity they needed when the switch to first-price happened,” Doherty said. “We took the time to overcommunicate the switches.”

It’s crucial for ad buyers to know what type of auction they’re bidding into—otherwise they can waste a lot of money, since each auction type prompts different strategies, according to Doherty.

For instance, in second-price auctions some buyers use a strategy of bidding high to make sure they win a bunch of impressions. This approach can work in second-price auctions, because the ad buyer can ensure they’ll win a lot of auctions while not paying as high of a rate as they bid. But if an ad buyer in a first-price auction used this strategy thinking they were in a second-price auction, that buyer would end up paying much more than anticipated.

As vendors change their pricing models, with some using first-price and others still using second-price, marketers are trying to get a better handle on how they’ll be billed. In a December 2017 survey by the World Federation of Advertisers (WFA) and dataxu, more than 60% of marketers worldwide said better understanding programmatic auction pricing is a priority for 2018.

Several industry observers have chalked the move to first-price up to the increasing calls for transparency in ad tech. In October, DSP Getintent analyzed 1 billion ad impressions across 39 sell-side platforms and found 52% of impressions came from second-price auctions with anomalies. Some platforms let the second-highest bid truly determine the clearing price, some had a fixed price floor that kept winning bids artificially high, and others set undisclosed price floors after the bids all came in, which allowed the sell-side platforms to pocket extra money from advertisers.

Doherty believes first-price auctions are more transparent because they give more clarity to ad buyers on what they should expect to pay for impressions they win. But there is more driving the shift than transparency, he noted.

“The real force [of pricing changes] is competition, not transparency in and of itself,” he said. “But it is also a sign of a maturing market.”