Bidders' Responses to Auction Format Change in Internet Display Advertising Auctions

TL;DR

This study examines how internet display advertisers' bidding behavior and prices change when auction formats switch from second-price to first-price, revealing significant initial price increases and gradual bid shading adjustments.

Contribution

It provides the first empirical analysis of bidders' responses to auction format changes in real-world online advertising markets using novel staggered adoption data.

Findings

Prices increase by 25% to 75% after format change

Price levels tend to revert over time, indicating bid shading adjustments

Bidders gradually learn to shade bids, aligning with theoretical expectations.

Abstract

We study actual bidding behavior when a new auction format gets introduced into the marketplace. More specifically, we investigate this question using a novel dataset on internet display advertising auctions that exploits a staggered adoption by different publishers (sellers) of first-price auctions (FPAs), instead of the traditional second-price auctions (SPAs). We analyze the auction format change using difference-in-differences regressions and a synthetic difference-in-differences estimator, which better handles pre-trends. The results show that revenue per sold impression (price) jumps considerably for treated publishers relative to control publishers, with increases ranging from 25% to 75% of the pre-treatment price level of the treated group. Moreover, for later auction format changes, the increase in price levels under FPAs relative to those under SPAs tends to dissipate over time, reminiscent of the revenue equivalence theorem, although the extent of this reversion depends on the specification. We view these results as suggestive of initially insufficient bid shading following the format change, as opposed to an immediate transition to a new Bayesian Nash equilibrium, with prices tending to decline in several specifications in a manner consistent with gradual adjustment in bidding behavior as bidders learn to shade their bids. Our work constitutes one of the first field studies on bidders'responses to auction format changes, providing an important complement to theoretical model predictions. As such, it provides valuable information to auction designers when considering the implementation of different formats.