Second Price Auctions Executed Poorly
https://www.stat.berkeley.edu/~aldous/Research/Ugrad/selene_xu.pdf
A Second Price Auction is an auction in which the person who places the highest bid on an item wins the item, but only has to pay the price of the second highest bid. Many different sites in varying industries use this type of auction. One obvious example is eBay. While bidding on eBay, the person who offers to pay the most wins the item and only has to pay an amount minisculely higher than the second highest bid. In a Second Price Auction, it is optimal to always bid your true value for the item. You do not want to underbid, because you then run the risk of losing the item. Since you pay the price of the second highest bid, the payoff of bidding your true value and winning is the difference between your true value and the second highest price. While bidding your true value is a dominant strategy for a Second Price auction, is it always the optimal option?
A statistician at the University of California, Berkeley gathered a bunch of data from eBay to see how prevalent over-bidding was in the actual market and their results were very surprising to me. When taking the total price (price of the item and shipping fees) into consideration, over-bidding was a real problem with 48.3% of people paying more than market price for the items they bid on. When the researchers disregarded shipping fees, only 15% of people over-bid on their items while using eBay. While this number is significantly smaller than the previous one, it still shows that people struggle with using bidding systems to their optimal value. It is easy to forget the shipping costs when placing bets on an item, but the fact that people still over-bid when not considering shipping is worrisome. Instead of over-bidding on these items, they could shop elsewhere and buy them for a set market price that is less than their bid they placed on eBay. Bidding your true value is still and always will be an dominant strategy for Second Price Auctions, but this data shows us that sometimes people are not always thinking and bidding intelligently during these auctions which often leads to sub-optimal outcomes. It is important to stay educated in your bidding strategies to make sure that you are making the optimal decision.