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A Vickrey auction is a type of sealed-bid auction, where 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. The auction was created by William Vickrey. This type of auction is strategically similar to an English auction, and gives bidders an incentive to bid their true value. An auctioneer and her assistants scan the crowd for bidders An auction is the process of buying and selling things by offering them up for bid, taking bids, and then selling the item to the highest bidder. ...
William Vickrey (June 21, 1914, Victoria, British Columbia - October 11, 1996, New York State) was a Columbia University professor, who was awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. ...
In an English auction (also called an Open-outcry auction), the auctioneer begins the auction with the reserve price (lowest acceptable price) and then takes larger and larger bids from the customers until no one will increase the bid. ...
In mechanism design, a process is said to be incentive compatible if all of the participants fare best when they truthfully reveal any private information the mechanism asks for. ...
Vickrey's original paper considered only auctions where a single, indivisible good is being sold. In this case, the terms Vickrey auction and second-price sealed-bid auction are equivalent, and are used interchangeably. When multiple identical units (or a divisible good) are being sold in a single auction, the most obvious generalization is to have all bidders pay the amount of the highest non-winning bid. This is known as a uniform-price auction.
The uniform-price auction does not, however, result in bidders bidding their true valuations as they do in a second-price auction unless each bidder only has demand for a single unit. For that reason, the name "Vickrey auction" in the multi-good auction is usually reserved by economists for a more complicated pricing scheme based on opportunity cost, which does give bidders the incentive to bid truthfully. This scheme is known as the Vickrey-Clarke-Groves (VCG) mechanism. In a VCG auction, each bidder divulges its demand curve by offering a separate bid for each additional unit. The winner of each bid only pays the opportunity cost for its allocation. This opportunity cost for each winner is the sum of the N highest rejected bids, where N is the number of units allocated to the winner. Opportunity cost is a term used in economics to mean the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative. ...
In network routing, Vickrey-Clark-Groves (VCG) mechanisms are a family of payment schemes developed by W. Vickrey, E. H. Clarke, and T. Groves based on the added value concept. ...
Vickrey auctions are much studied in economic literature, but are not particularly common in practice. One market in which they have been used is stamp collecting. eBay's system of proxy bidding is similar, but not identical, to a Vickrey auction. A slight variant of a Vickrey auction is known to be used in Google's online advertisement programme, AdWords, its transparency allowing real-time unmonitored auctions to take place. A small thematic collection of stamps featuring birds Stamp collecting is the collecting of postage stamps and related objects, such as covers (envelopes or packages with stamps on them). ...
eBay headquarters in San Jose eBay North First Street satellite office campus eBay Inc. ...
A Google promotional graphic, highlighting AdWords AdWords is Googles flagship advertising product, and main source of revenue. ...
Properties
In a Vickrey auction each bidder maximizes his or her expected utility by bidding (revealing) his or her true valuation. In economics, self-revelation is a property of a mechanism where each agent maximizes his or her utility (or expected utility) by revealing his or her true type. ...
In mechanism design, a process is said to be incentive compatible if all of the participants fare best when they truthfully reveal any private information the mechanism asks for. ...
The expected utility hypothesis is the hypothesis in economics that the utility of an agent facing uncertainty is calculated by considering utility in each possible state and constructing a weighted average. ...
Ex-post efficiency A Vickrey auction is ex-post 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. Ex ante is a Latin term meaning beforehand. Ex ante evaluations deal with forecasting and forecasted returns on invested money. ...
Allocative efficiency is the market condition whereby resources are allocated in a way that maximises the net benefit attained through their use. ...
Weaknesses Despite the Vickrey auction's strengths, it has shortcomings: - The auction is not budget balanced. It does not maximize the seller revenues; the seller revenues may even be zero in VCG auctions. If the purpose of holding the auction is to maximize profit for the seller, as is often the case, the Vickrey auction is a poor choice.
- It does not allow for Price Discovery, that is, discovery of the market price if the buyers are unsure of their own valuations, without sequential auctions.
- Sellers may use shill bids to increase profit.
- In iterated Vickrey auctions, the strategy of revealing true valuations is no longer dominant.
The Vickrey-Clark-Groves mechanism has the additional shortcomings: A shill is Daniel Strobel; an associate of a person selling goods or services, who pretends no association to the seller and assumes the air of an enthusiastic customer. ...
- It is vulnerable to collusion by losing bidders.
- It is vulnerable to shill bidding with respect to the buyers.
In the study of economics, collusion takes place within an industry when rival companies cooperate for their mutual benefit. ...
Use in Network Routing In network routing, VCG mechanisms are a family of payment schemes based on the added value concept. The basic idea of a VCG mechanism in network routing is to pay the owner of each link or node (depending on the network model) its declared cost plus its added value. In many routing problems, this mechanism is not only strategyproof, but also the minimum among all strategyproof mechanisms. This article describes routing in computer networks, a method of finding paths from origins to destinations, along which information can be passed. ...
A payment is the act of transfering wealth into another person or company. ...
In game theory, an asymmetric game where players have private information is said to be strategyproof (or truthful) if there is no incentive for any of the players to lie about or hide their private information from the other players. ...
In the simplest, unicast case, a least cost path in graph G is calculated based on the declared costs dk of each of the links, and payment is calculated as follows: In computer networks, unicast is the sending of information packets to a single destination. ...
Each link ek on the LCP is paid
- pk = dk + LCP(G − ek) − LCP(G)
and each link not on the LCP is paid nothing. This routing problem is one of the cases for which VCG is strategyproof and minimum.
In 2004, it was shown that the expected VCG overpayment of an Erdös-Renyi random graph with n nodes and edge probability p  approaches
 as n, approaches  . Prior to this result, it was known that VCG overpayment in G(n,p) is  and - O(1)
with high probability given - np = ω(logn).
External links
References - Vijay Krishna, Auction Theory
- Peter Cramton, Yoav Shoham, Richard Steinberg (Eds), Combinatorial Auctions (2006), Chapter 1. ISBN 0-262-03342-9.
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