The Open Auction is the standard ad auction. It is used to select ads that appear on your pages and determine how much you’ll earn from those ads. The auction is designed to ensure that you’re earning the maximum possible revenue for your ad inventory. The more advertisers that bid to appear on your pages, the higher the competition is for your ad units, and the more you can earn.
In the Open Auction, ad exchanges match the buyers’ targeting with your inventory and seek the highest bid. Simply put, the buyer with the highest bid wins.
There are two types of auctions; first price and second price.
1. First Price Auctions: In a first price auction, the winner ends up paying his/her actual bid, hence there’s no price reduction in a first price auction.
2. Second Price Auctions: In a second price auction, the winner (the bidder with the highest bid) doesn’t pay his/her actual bid, but the second highest bid; this is also called “price reduction”.
For example, if there are three net bids in a first price auction, a net bid with a $4.00 CPM, a net bid with a $3.75 CPM, and a net bid with a $3.50 CPM, the winning bid would be the $4.00 CPM and the buyer would pay $4.00. In a second-price auction, the advertiser would only pay the second highest net bid which in this example would be $3.75.