Two Models of Bid-Taker Cheating in Vickrey Auctions

Vickrey (second-price, sealed-bid) auctions have attractive theoretical properties, but standard first-price, sealed bidding is far more common. Explanations of the rarity of Vickrey auctions rely on concern about revelation of private information and on fear of cheating. We present two models of bid-taker cheating: a static, game-theoretic model and reputation-based model of repeated auctions. In the first, an honest bid-taker will not choose a Vickrey auction. In the second, a trusted bid-taker who cheats when it pays eventually destroys his reputation and the trust upon which the use of Vickrey auctions depends