A Vickrey auction (also called a “second-price sealed-bid auction”) is a sealed-bid format where the highest bidder wins but pays the amount of the second-highest bid, not their own bid. Named after economist William Vickrey, who proved theoretically that this format incentivizes bidders to reveal their true willingness to pay.
Vickrey auctions are rare in commercial practice but common in academic and economic experiments. They’re used in some online ad-auction systems (Google Ads has a variant), spectrum auctions, and certain financial securities issuances. Their appeal is theoretical purity; their drawback is that bidders often don’t trust the format and underbid anyway.
Vickrey won the 1996 Nobel Prize in Economics partly for his work on this auction format. The theoretical insight: if you’ll pay the second-highest bid no matter what, your optimal strategy is to bid your true willingness-to-pay. Bidding higher risks paying more than the item is worth (the “winner’s curse”); bidding lower risks losing the auction without saving any money on price. Despite the elegant theory, the format has struggled to gain traction in physical-goods auctions because bidders dislike the perceived complexity and worry about being misled about the second-highest bid.