What is bid shading?
Bid shading is a technique DSPs use in first-price auctions to lower a bid from the buyer's maximum to the price the algorithm predicts is just enough to win. It stops advertisers overpaying now that winners pay what they bid. The shading model learns from past wins, losses and floor prices for similar impressions.
After exchanges moved to first-price auctions, bidding a true value meant paying it. Bid shading recreates some of the savings of a second-price auction by estimating the bid landscape: the likely distribution of competing bids. If a buyer values an impression at $10 CPM but the model predicts $6 will usually win, it might bid $6.50.
Some SSPs also offered their own shading products to buyers, which created conflicts of interest. Publishers respond with dynamic floor prices, so shading and flooring have become an algorithmic tug-of-war that affects win rate and prices.