Real Time Bidding is a live auction process conducted in real time for each individual ad impression. Sounds simple, yet the reality is far more complex. In this answer, we will address the buy side only (demand side) and provide a very simplistic explanation.
There are two types of auctions, first price and second price auctions. In first price auctions, the winning bid is the winning bid. In second price auctions, the winning bid, is the second highest bid. Using information from the illustration above, the highest bid is $3.50 and the second highest bid is $3.25. In the second price auction the winning bid is $3.25. An added benefit of second price auctions is that advertisers with deeper pockets cannot unduly influence the bidding process by overbidding to win all the auctions.
Second price auctions are more prevalent than first price auctions. When placing bids in the auction, the sell side (supply side), typically sets a minimum floor they are willing to accept, known as the bid floor. It is not uncommon for bid floors to fluctuate throughout the day. This tends to make the bidding process more interesting for a number of reasons.
Before spending too much time answering the specific question of "what is real time bidding", lets establish a rudimentary understanding of the process by learning more about the who, what and when.
Who are the participants in the auction process:
For our purpose, the participants are the advertiser who spends the money to place the ad, the publisher who displays the ad, the ad network who works on behalf of the advertiser or publisher and the ad exchange where the auction is conducted. The ad exchange acts as an intermediary matching ad buys with ad requests before submitting the qualifiying ads to the auction.
What happens during the auction process:
The advertiser creates a campaign and sets specific targeting parameters. Once the campaign is live the ad network submits the campaign to the exchange.
Similarly, the publisher has established specific requirements for the ads they wish to receive. These might include a minimum bid floor or series of bid buckets, which are minimum bids for different users of varying characteristics or quality at difference prices within a range of prices and they might specify certain requirements for creative size and format. The publisher uses a monetization partner who manages the monetization of their ad inventory. For consistency, we'll call them an ad network who is submitting the publishers ad inventory to the exchange.The ad exchange is where the publishers ad inventory, also called ad requests, is matched against the advertisers campaigns.
When does the auction take place:
The process starts once a user in the app has reached a point where a request is made for an ad.
The request is forwarded to the exchange on behalf of the publisher, the exchange matches the advertiser(s) who submit an ad that match the publishers request. Bids are compared to find the highest bid. Depending on the auction type, the bid is awarded based on the highest price, (first price auction) or second highest price (second price auction).
The entire process typically occurs in 80 to 120 milliseconds.
What is Real Time Bidding?
Real Time Bidding matches buyers and sellers in a live auction process conducted for each individual ad impression, in real time.