A second price auction is an auction format where the winning bidder pays the amount of the second-highest bid rather than their own bid. This type of auction is commonly used in online advertising and real-time bidding (RTB) systems, where advertisers compete for ad placements. The primary advantage of this model is that it promotes honest bidding, as the winner’s payment is determined by market competition rather than their maximum willingness to pay.
The second price auction mechanism fosters a fair bidding environment by minimizing bid shading – a strategy where bidders deliberately underbid to avoid overpayment. Since the winner only pays the second-highest bid, participants are incentivized to bid their true valuation, knowing their bid won’t directly set the final price. This leads to more efficient allocation of advertising space and better outcomes for both advertisers and publishers.
In practice, second price auctions have become the industry standard across digital advertising platforms. They ensure transparency and fairness by letting market competition determine prices. Advertisers benefit by potentially paying below their maximum bid, while publishers secure competitive rates for their inventory. As programmatic advertising evolves, the second price auction remains fundamental to modern ad buying processes.
👉 See the definition in Polish: Second Price Auction: Aukcja z drugim najwyższym bidem