Vickrey auction

A Vickrey auction is a type of sealed-bid auction. 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. This type of auction is strategically similar to an English auction and gives bidders an incentive to bid their true value. The auction was first described academically by Columbia University professor William Vickrey in 1961 though it had been used by stamp collectors since 1893. In 1797 Johann Wolfgang von Goethe sold a manuscript using a sealed-bid, second-price auction.

Vickrey's original paper mainly considered auctions where only a single, indivisible good is being sold. The terms Vickrey auction and second-price sealed-bid auction are, in this case only, equivalent and used interchangeably. When either a divisible good or multiple identical goods are sold in a single auction, however, these terms are used differently.

Vickrey auctions are much studied in economic literature but uncommon in practice. Generalized variants of the Vickrey auction for multiunit auctions exist, such as the generalized second-price auction used in Google's and Yahoo!'s online advertisement programmes (not incentive compatible) and the Vickrey-Clarke-Grove Auction (incentive compatible).

In a Vickrey auction with private values each bidder maximizes their expected utility by bidding (revealing) their valuation of the item for sale. These type of auctions are sometimes used for specified pool trading in the Agency Mortgage-Backed Securities (MBS) market.

A Vickrey auction is decision 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. It is only ex-post efficient (sum of transfers equal to zero) if the seller is included as "player zero," whose transfer equals the negative of the sum of the other players' transfers (i.e. the bids).

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