The Auction Problem

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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.

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.

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

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.

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.

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