Secondprice

Second-price refers to a class of auction formats in which the highest bidder wins the item but pays the amount of the second-highest bid. The most common implementation is the single-item sealed-bid second-price auction, also known as the Vickrey auction. Bidders submit bids without knowing others’ bids, the highest bid wins, and the price paid is the second-highest bid. If a reserve price is used, the winner pays the greater of the second-highest bid and the reserve; if the highest bid does not meet the reserve, the item is not sold.

Key properties include incentive compatibility in the canonical single-item case: bidding one’s true valuation is a dominant strategy, making the mechanism strategically straightforward for participants and often efficient, since the item tends to go to the bidder with the highest value. The mechanism was proposed by William Vickrey in 1961 and later influenced auction theory and mechanism design, earning Vickrey a place in economic literature and Nobel discussions.

Applications and variants appear across economics and online platforms. While the pure second-price auction is primarily a theoretical benchmark, real-world implementations influence procurement, government auctions, and digital marketplaces. Many online advertising and marketplace systems employ related second-price or generalized second-price mechanisms, sometimes with adaptations such as reserve prices or floor prices. Limitations include potential vulnerability to collusion, bid shading in practice, and deviations from private-value assumptions in multi-unit or combinatorial settings.