Let's talk about auction types. So we know through this RTB process that people are bidding on inventory, which means that there must be an auction taking place. But there are different types of auctions and different ways to buy and sell that inventory. So the first one is a first price auction, and a first price auction, the programmatic buying model, where if your bid wins, you pay exactly what you bid. This type of auction maximizes revenue for the potential seller. So if I bid $5 on an ad unit, I'm going to pay $5 for that ad unit and a second price auction.
The programmatic buying model where if your bid wins, you pay one cent above the second highest bid in the auction. This is a standard auction type across everything in digital media. There are Some companies that work in a first price auction, but second price is where the vast majority of all digital advertising runs. If you are doing programmatic if you are running search ads on Google or Bing, if you're running ads on Facebook or Twitter, they're all using a second price auction. So in that example before, if I did $5, but the next highest bid was $3, I would pay $3 and one cent. This is really the best way for an advertiser because they know they're not overpaying for a unit.
They don't blow their budget upfront. And they're allowed to place a very high bid, knowing that they're not going to pay any more than that. But in all likelihood, their end, their effective CPM or their effective bid is probably going to come in a lot lower. For the seller. Obviously, the publisher would like to get as much money as possible. But if the publisher or if the advertiser is blowing all their budget on a first price auction, then that means there's less money to go around.
Everybody. So in reality, second price auction is the best way to work for everyone. Now within that there are different ways for that auction to take place, the traditional waterfalls what we see here, and that an ad is called goes to the ad server. And then there is a Ad Exchange demand partner or some other DSP or at our ad network that is allowed to bid on that inventory. If that demand partner fails to bid, then it would go down to the next one in line and so on and so forth. But you also see that the CPM lowers as you go further down the waterfall.
If you are the one at the top getting first look, then you need to be able to bid the highest amount because you get priority seating. If you're a second or third, the amount that you're charged drops off as you You are lower in the scale, so you're not required to pay as much. The second one is header bidding, which is relatively newer one. This is essentially a true auction, and that all advertisers are allowed to bid up front. And then whatever the highest bid is wins the auction. Now obviously, it's a very complicated process for both of them.
So I'm going to go into a whiteboarding session now about those two different waterfalls and header bidding options.