First-price vs. second-price auctions

What the winner pays

Here are three bids for one item. The minimum price is $20. Keep the bids fixed for a moment to compare the bills.

The $100 bid wins in both cases. First-price charges $100; second-price charges $80. Losing bidders pay nothing in either format.

Why people bid differently

In a first-price auction, your bid has two jobs: beating the competition and setting your bill. If you’re willing to pay $100, bidding all $100 leaves no saving if you win. Bidding less leaves you a better deal, but gives a competing offer more chance to beat yours.

In a second-price auction, a lower winning bid does not lower your bill. Against an $80 competing bid, an offer of $100 or $90 still costs $80. An offer below $80 loses a purchase you were willing to make. For an item with a value you know, this is why bidding your maximum makes sense.

That advice assumes your limit is known. If you’re estimating an uncertain value, the winner’s curse explains why treating an estimate as a firm limit can go wrong.

Which raises more money?

The first-price bill is higher in the example because we held the bids fixed. Real bidders know the payment rule before they make an offer. They may offer less when they will have to pay that whole amount.

Economic models can produce the same average revenue for both formats once bids adjust. That result is called revenue equivalence. It is not a promise about a particular group: the amount raised also depends on competition, what bidders know, and how they respond to risk.

Choosing first-price simply because it charges the highest bid is therefore not a reliable way to raise more money.

The minimum price still matters

In second-price, the runner-up’s offer cannot push the payment below the seller’s announced minimum. If only one bidder meets that minimum, they win at the minimum. If no bid meets it, there is no sale. In first-price, the winner still pays their own qualifying offer.

Explore the bidding examples for first-price and second-price auctions, or go straight to hosting first-price or hosting second-price.