Bid shading helps advertisers find the most affordable ad inventory prices using DSPs and ad exchanges.
In bid shading, algorithms work in a way to search for the highest and lowest bids that are averaged based on market, app, ad size, exchange, and bid data.
Also, the lowest price a buyer can submit to win an online auction is predicted through bid shading. This is done by comparing historical clearing prices for ad placement to what buyers are willing to pay.
Here is an example
If $7 and $5 are the highest bids for an auction:
The buyer of an impression at $7 will pay $5.01 if it is a second-price auction, whereas it costs $7 per impression if it is a first-price auction.
The agenda of bid shading is to reduce the price when a shift happens from a first-price auction to a second-price auction.
This eventually benefits buyers by reducing the risk of overpaying for an impression while the publisher gets a bid higher than a second-price auction.