Programmatic · also called Vickrey auction
Second-price auction
A second-price auction is one in which the highest bidder wins but pays just above the second-highest bid (or the floor), which was the original standard in real-time bidding.
In a second-price auction the winner pays a price set by the runner-up: typically the second-highest bid plus one cent. If you bid US$5 and the next bid is US$3, you pay US$3.01. Economists like it because it encourages everyone to bid their true value; you never pay more than necessary.
Early real-time bidding ran on second-price rules. They broke down in practice for several reasons: with header bidding, the winners of several second-price auctions were then compared with each other, making pricing unpredictable; some exchanges raised clearing prices by using hidden, dynamic floors or took a cut invisibly; and last look advantages distorted competition. Buyers could not tell what they were really paying.
By 2019 most major exchanges had switched to first-price auctions. Search advertising still uses a variant (Google's ad auction is a generalised second-price style auction adjusted by Quality Score and other factors).
Think of it like this
A second-price auction is like eBay's automatic bidding: you set your maximum, but you only pay a little more than the next highest bidder.
An example
Bids are US$4.00, US$2.50 and US$1.90 CPM with a US$1.00 floor. The US$4.00 bidder wins and pays US$2.51.
Related terms
First-price auction
A first-price auction is an auction in which the highest bidder wins and pays exactly what they bid, which is now the standard model in programmatic advertising.
Bid shading
Bid shading is a technique DSPs use in first-price auctions to lower a bid automatically toward the price actually needed to win, so advertisers do not overpay.
Floor price (reserve price)
A floor price is the minimum bid a publisher will accept for an impression; bids below the floor are rejected, even if they are the highest bid in the auction.
Auction dynamics
Auction dynamics are the rules and behaviours that decide who wins programmatic ad auctions and at what price, including auction type, floors, fees, bid shading and bid order.
Keyword bidding
Keyword bidding is choosing search terms your ads should appear for and setting how much you are willing to pay per click when someone searches for them.