Question

. In the 2nd-Price Sealed-Bid auction, the highest bidder wins, but pays a price equal to the second-highest bid. So why wouldn’t a player simply submit an absurdly large bid, thus increasing the likelihood of winning - after all, she doesn’t pay this bid. In other words, consider a player whose true valuation is 10, but who bids 100.

Answer 1

It is not optimal for a player to bid an absurdly large bid as the optimal strategy is to bid one's own true value. Let us see this with an example.

Consider a player whose true valuation is 10, but who bids 100. Now, if someone bids more than 10 but less than 100, say 50 and this is the second-highest bid, the player will suffer a loss. He wins the auction and pays the second-highest bid = 50 but his valuation is only 10, thus there is a loss of 40

Thus, by bidding an absurdly large bid, there is a risk of making a loss for a player and the equilibrium strategy is for everyone to bid their true value in a second price auction.