Vickrey auction

A Vickrey auction is a type of sealed-bid auction, where bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins, but the price paid is the second highest bid. The auction was created by William Vickrey to reduce winner's curse by encouraging people to bid what they believe the object is truly worth. This type of auction is strategically similar to an English auction.

Vickrey's original paper considered only auctions where a single, indivisible good is being sold. In this case, the terms Vickrey auction and second-price auction are equivalent, and are used interchangeably. When multiple identical units (or a divisible good) are being sold in a single auction, the most obvious generalization is to have all bidders pay the amount of the highest non-winning bid. This is known as a fixed-price auction .

The general fixed-price auction does not, however, result in bidders bidding their true valuations as they do in a second-price auction. For that reason, the name "Vickrey auction" in the multi-good auction is often reserved for a more complicated pricing scheme based on opportunity cost, which does give bidders the incentive to bid truthfully.

Vickrey auctions are much studied in economic literature, but are not particularly common in practice. One market in which they have been used is stamp collecting. Ebay's system of proxy bidding is similar, but not identical, to a Vickrey auction.

External links

• Paper on the history of Vickrey auctions in stamp collecting