Auctions in Online Advertising

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Though the classic English auction you see in movies [and in art houses like above] is still used in traditional auction houses, online auctions have moved on. In English Auctions, you used to place a bid and pay exactly the amount you bid. Simple. But most auctions nowadays – especially those online – are conducted differently. I read about the structure and reasoning behind a Vickrey auction around 4 months back and I have been interested in the field ever since.
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In a Vickrey auction, you pay the second price , that is, if you win the auction, you need to pay the amount of the second highest bid. Now, the first impression when I read this was that ebay have been doing it for a while and such auctions suck. In an ebay auction you only win if you are up late at night and bidding at the very end to bump your bid over the current highest.
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A Vickrey auction is both a second price and a sealed bid auction. Sealed bids means that no one knows what the other is bidding. So at any given point in time you don’t know what the highest bid for an object is. This removes the possibility of that last second bid that will nick the auction by a few milliseconds.
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Why would I be looking at auctions? I work in online advertising and the future of display advertising is the ad exchange using Real Time Bidding. Already we see a huge proportion of revenue coming from this method which involves buying ad inventory per single impression (or page view) by bidding against other buyers.
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The value of this single impression is decided by a huge number of variables. Buyers made the first tactical move with their smart use of cookies and retargeting of ads. They use cookies to accurately estimate the value of the single impression (in all probability – that single user) based on his/her past online browsing behaviour. This enabled them to identify many bargains since they could target high value customers on sites which are cheaper to advertise on! Advertisers also had the ability to target only those customers who had interacted with their product websites earlier. All this meant that adoption of this technology was relatively fast.
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Online display and search advertising has moved towards real-time bidding auctions. Though the final dream of all media (Newspapers, TV, Radio, Search and Display) being sold through a single integrated auction format is still a long way away, its not due to lack of technology but due to inertia to new technology in old media.
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I am looking to put together all that I have read and understood about auction theory with respect to online advertising and argue for and against the various theories that are currently being used in the industry. Hopefully there will be a few more posts on some of the more subtle tactics used by both sides in auctions.
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