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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. This type of auction is strategically similar to an English auction, and gives bidders an incentive to bid their true value.

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 sealed-bid 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 uniform-price auction.

The uniform-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 usually reserved by economists 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. A slight variant of a Vickrey auction is known to be used in Google's online advertisement programme, AdSense, its transparency allowing real-time unmonitored auctions to take place.

Properties

Self-revelation

In a Vickrey auction each bidder maximizes his or her expected utility by bidding (revealing) his or her true valuation.

Ex-post efficiency

A Vickrey auction is ex-post efficient (the winner is the bidder with the highest valuation) under the most general circumstances; it thus provides a baseline model against which the efficiency properties of other types of auctions can be posited.

External links

• Paper on the history of Vickrey auctions in stamp collecting

References

• Vijay Krishna, Auction Theory

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This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.