The Auction Problem



Get Surfshark VPN at and enter promo code VSAUCE2 for 84% off and 4 extra months for free.

Thanks to Surfshark VPN for sponsoring this video and supporting Vsauce2.

The next time you buy a retro game or old t-shirt in an online auction, thank William Vickrey’s 1961 paper, “Counterspeculation, Auctions, and Competitive Sealed Tenders” — because the simple auction style we take for granted today is actually filled with nuance and complexity.

Auctions have been around as long as one person has had an item to get rid of and at least two people wanted it. From Herodotus’ writing, we know that the ancient Babylonians held auctions over 4,000 years ago. But auctions haven’t changed very much over time, and the general bidding structures have remained intact. It seems like aside from differences like submitting a single private bid vs. open bidding back and forth, there isn’t a lot to adjust.

That couldn’t be further from the truth, as advances in auction theory in economics have changed our understanding of optimal bidding and optimal selling. By formulating the revenue equivalence theorem and working out the sometimes-harmful incentives in different auction formats, Vickrey and those who followed him are making the complexity of everyday transactions invisible.

*** SOURCES ***

Vickrey, William. “Counterspeculation, Auctions, and Competitive Sealed Tenders.” The Journal of Finance, vol. 16, no. 1, 1961, pp. 8–37. www.jstor.org/stable/2977633

Güth, Werner, et al. “A Theoretical and Experimental Analysis of Bidding Behavior in Vickrey-Auction Games.” Journal of Institutional and Theoretical Economics, vol. 139, no. 2, 1983, pp. 269–288. www.jstor.org/stable/40750595

Rothkopf, Michael H., et al. “Why Are Vickrey Auctions Rare?” Journal of Political Economy, vol. 98, no. 1, 1990, pp. 94–109. www.jstor.org/stable/2937643

Rothkopf, Michael H., and Ronald M. Harstad. “Two Models of Bid-Taker Cheating in Vickrey Auctions.” The Journal of Business, vol. 68, no. 2, 1995, pp. 257–267. www.jstor.org/stable/2353115

Lucking-Reiley, David. “Vickrey Auctions in Practice: From Nineteenth-Century Philately to Twenty-First-Century E-Commerce.” The Journal of Economic Perspectives, vol. 14, no. 3, 2000, pp. 183–192. www.jstor.org/stable/2646925

*** LINKS ***

Vsauce2:
TikTok:
Twitter:
Facebook:
Talk Vsauce2 in The Create Unknown Discord:

Hosted and Produced by Kevin Lieber
Instagram:
Twitter:
Podcast:

Research and Writing by Matthew Tabor

Editing by John Swan

Huge Thanks To Paula Lieber

Music by Basswaite:

Select Music By Jake Chudnow:

Get Vsauce’s favorite science and math toys delivered to your door!

Get Vsauce2’s Woven Math t-shirts/hoodies:

#education #vsauce #math

45 comments

  1. Cool. Apart from the fact that there is no such thing as Nobel Prize in economics, and it was fraudulently inserted into public mind as something real quite recently. ;))

  2. I don't get it. How is that honest? I bid $8000, the seller bids $7999 and I'm forced to buy the thing for $7999. No matter how much I bid, the seller bids X-$1. So it's the same as bidding straight. The seller tries to raise the price and outbids me, I don't want to pay more so I give up and they fail to sell. They can't fool me, I know how much I can pay. Can you tell me the situation when it makes sense?

  3. I don't doubt it's a good method to get people to bid honestly, but it seems very counterintuitive.

    Knowing what I know about people, many would simply post a ridiculous bid just to be the one to win. They'd feel more comfortable bidding ridiculously high because they know if they win they won't actually pay that much.

  4. But this changes if Jake knows that he’s at a Vickers Auction, because he could just immediately bid $10,000 after the $3.00 bid was made. Then he can scoop the PS5 for $3.

  5. why did this video remind me of being robbed with a revolver to my throat
    is this the PTSD the police told me about its been 3-4 years … its just strange that it popped in my head

  6. In regards to eBay: it would be interesting to see what would happen if they used concealed random auction end. For example. It's just stated that the auction ends around 1 o clock. But the exact end is at radom between let's say 12.50 and 13.10. but without telling the bidders.

  7. The Auction I join is similar. I can bid up the old fashioned way, or enter a Maximum bid. Say I put in a maximum bid of $300, and the other bidder stopped at $160. My auto bid would then win me the item at $170 as that is the next bid increment.
    Most of the time, I am outbid. However sometimes, they have an item the bidders are not looking for, or it is poorly attended. At those I pick up some great deals. For example, bought a pallet of PC's at a government surplus auction and averaged $25 each for them. Had a heyday on CL selling them from $100 to $200 each depending on memory and processor. Last week got a dozen LCD monitors for $ 10 each. Selling them for $20 to $50 each depending on the model and screen size. Sold 5 of them as a batch today. Love a good government surplus auction. Picked up my 4KW diesel generator for under a grand. Nice buy.

  8. Given the possible number of people auctioning bidding a bid of 3 is technically and attempt to help the next person if other people bid one and two. But of course the other people would never bid one and two because they know it’s the lower bids. So they would be maybe 345. And unfortunately everyone can be on the same number although they will likely hopefully not. They ironic thing is that everyone can bid $10 or $11 and if they all talk to each other then it would automatically just go for $10. Nobody would know who to give it to because so many people but the same thing. Generous people could simply not bid except for maybe one dollar to be the other person where is the other person can build whatever they want seeming legit and end up paying one dollar. So if no one else bid that three dollar bid could’ve given the 550 guy the deal of his life. The problem is there is no way to ensure that the price goes to where you might want it to be. Higher bidding that is transparent and then with a Vickery rule of you pay with the last person before you would’ve paid is oddly a weird way to go about it because that alternative option means you can say any number you want but unless you can Pay it you wouldn’t actually get the item. Because knowing someone says crazy numbers and then the next person says crazy number and one well clearly they never would because it’s too crazy.

  9. Don't some storage lockers do a modified Dutch auctions where it descends like a Dutch auction and then becomes an ascending auction after the first bid?

  10. i cant believe Vsauce2 just said the "pro gamer move" meme even though its literally their own meme.
    Now thats a pro gamer move

  11. before I watch the rest of the video I'm gonna put my answer. I think they'd do a vickrey auction hoping people would bid way too high. If 2 people bid way too high, the winner still has to pay the second highest price which could still be really good.

  12. It's basically prisoners dilemma but easy to cheat. You know that everyone plays fair, so you don't. An average between highest and second highest would make more sense

  13. That would be nice if ebay actually only made you pay the 2nd highest bid

    I've had many auctions where I bid higher because I kept getting raised, and then ended up having to pay 10-20 dollars higher than the 2nd highest bid

  14. Except for the fact that people get caught up in the bidding “war” on eBay and some people decide to “snipe” in at the last minute to drive the amount higher. This causes people who were previously bidding to suffer from the “endowment effect” because they THINK they already won it, basically destroying eBay as a Vickrey Auction because it actually functions as a traditional English auction with an ability to proxy bid rather than a TRUE Vickrey Auction. In a properly run Vickrey Auction no one ever knows the bids until AFTER all bidding closes but the information obtained via eBay auctions by all bidders sabotages it as a true Vickrey scheme.

Leave a comment

Your email address will not be published. Required fields are marked *