The Futility of Soft Floors in Auctions

Several of the auction-driven exchanges that facilitate programmatic buying of internet display advertising have recently introduced “soft floors” in addition to standard reserve prices (called “hard floors” in the industry). A soft floor is a bid level below which a winning bidder in the auction pays his own bid instead of paying the second-highest bid as in a standard second-price auction the ad exchanges used to employ. This paper shows analytically that soft floors cannot increase the auctioneer’s revenue, and they can decrease it. When bidders are symmetric, soft floors have no effect on revenue, because there always exists a symmetric equilibrium in strictly monotonic bidding strategies, and standard revenue-equivalence arguments thus apply. The industry often motivates soft floors as tools for extracting additional expected revenue from an occasional asymmetrically high bidder, for example a bidder re-targeting the consumer making the impression. When such an asymmetrically high bidder is added to a set of symmetric regular bidders, soft floors decrease revenue because bid-shading by the regular bidders more than erodes the benefits of the additional pricing pressure on the high bidder. I find only one possible scenario in which soft floors may enhance revenue in the asymmetric situation: when the level of the soft floor is so high that nobody bids above it, and the level of the reserve price is simultaneously sub-optimally low. Contact: UCLA Anderson School of Management, Los Angeles, CA 90095. Email: [email protected]