The Lovely but Lonely Vickrey Auction

This chapter discusses the theoretical advantages and disadvantages of the Vickrey-Clarke-Groves (VCG) mechanism, also known as the Vickrey auction. It presents several virtues of a VCG auction, which include the dominant strategy property and its scope of application, and its weaknesses that are responsible for the rarity of the VCG mechanism in practice. In this mechanism, efficient allocation of all packages is made in order to maximize total value and the winner achieves a profit that is similar to his incremental contribution to the total value. The chapter emphasizes that more practical procedures are required to remove imperfections and other limitations of the Vickrey auction that are decisive for most practical applications. These shortcomings include the possibility of generating very low revenues and the chances of discouraging value-creating mergers among bidders. Also, in this type of auction, bidders are asked to reveal values for all packages without providing any information regarding prices of items.