I have no background in this area, and as an economic theorist, I would make an excellent gardener, so I may have missed the point entirely.
However various websites I visited have explained the Vickrey auction system as a system where all parties make a secret bid simultaneously. The highest bidder obtains the item but at the price offered by the second highest bidder.
The purported benefit of this model is that “bidders have the incentive to bid what they think the item is worth and not worry about what others will bid.” (cite: http://www.kunoozy.com/help/type_auction.cfm)
Am I missing something here? If everyone has an incentive to make a bid that is reasonable (to them), can’t the system be easily exploited by making sure your bid is the highest. As an extreme example, I mean bidding 1,000,000,000 to the power of 100 $ for a common pencil). As my bid is the highest, I get the pencil but only pay what the second highest bid was - which, according to the above cite, should be a reasonable figure.
I can see how people might come back and say the system works for precisely the reason that I outlined, i.e., if any two parties seek to exploit the system in the same way then one of them is going to lose bigtime, and this fact keeps the bids reasonable. But the paradox is (or appears to me to be) that if people can be counted on to make reasonable bids, then the system is open to exploitation. On the other hand, if people can’t be counted on to make reasonable bids then the purported benefit of the system is illusory.
What’s the deal?