Have you ever heard of a Vickrey or second-price auction?

Asked by LostInParadise (32181

) April 12th, 2023

It is interesting but very counter-intuitive. The basic idea is that in an ordinary single-price sealed-bid auction, there is a strong tendency for bidders to cut back on what they bid, figuring they only have to bid higher than the next highest bidder. In a Vickrey auction, named for the guy who thought of it about 60 years ago, the winning bidder is still the one who offers the highest bid, but what the person pays is the value of the second highest bid.

For reasons given in the link, there is an incentive for bidders in a Vickrey auction to bid what they are willing to pay. The question then is whether the second highest bid, which is what is paid, is higher than the highest bid in an ordinary sealed-bid auction. It is not clear to me why that should necessarily be the case.

One thing of interest is that a sealed second-price auction resembles an open, multi-bid auction. When people can change their bids, the winner will be the person who bids more than what the second highest bidder is willing to offer.

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2 Answers

I think I have heard of it, but forgot it. But that could be deja vu.

I don’t think it is necessarily the case that the Vickrey auction will produce a higher final price. How people will react is not entirely predictable, nor is the pool of people and their minimum bids.

For example, in the case where there is a significant gap in the amounts the two highest bidders are willing to bid, the Vickrey auction could produce a lower amount paid.

But it seems to me that the clearest reason why Vickrey auctions might tend to produce more, is what you wrote in your question: in a non-Vickrey sealed auction, bidders may tend to not bid the most that they’re willing to pay. Various things may enter their imaginations as they do so, but they’re guessing what they might get it for, what others might bid, and/or they may be second-guessing what others will be bidding using similar mindsets. Also, some people may dread paying more than they could have, in theory. Vickrey encourages bidding the actual highest amount one is willing to pay.

Zaku (30571

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