In a sealed-bid auction where the winner pays the second-highest bid, bidding your true value is optimal.
Vickrey's 1961 result, and eBay's proxy bidding is the everyday implementation. Truthful bidding is optimal because your bid determines whether you win and not what you pay.
In practice
- A bidder who would pay £400 enters £400, wins at £310, and gains nothing from having guessed what the others would do.
- A council procuring by sealed bid and paying the second price stops receiving the strategic underbids that used to decide its contracts.
- Further reading
- Wikipedia
- Subject
- Games & Strategic Interaction
- Essay
- What is provable, and what people actually do