An incentive-compatible mechanism for revealing true willingness to pay in a private value auction is
A)impossible
B)a Dutch auction
C)a second-highest sealed bid auction
D)a sequential auction with open bidding
E)a discriminatory price all-or-nothing auction.

Question

Quizplus · Accepted Answer

A second-highest sealed bid auction is the most effective incentive-compatible mechanism for revealing true willingness to pay in a private value auction. This is because each bidder has an incentive to bid their true willingness to pay because the highest bidder wins, but only pays the price of the second-highest bid. Therefore, if a bidder overestimates their willingness to pay and bids too high, they run the risk of winning the auction and paying more than they wanted to. Conversely, if a bidder underestimates their willingness to pay and bids too low, they run the risk of losing the auction and potentially missing out on the item. This mechanism ensures that each bidder reveals their true willingness to pay in order to maximize their chances of winning the auction at the lowest possible price.

An Incentive-Compatible Mechanism for Revealing True Willingness to Pay in a Private