Sealed-Bid Auction

In an open auction, bidders watch each other and can react, but in a sealed-bid auction each bidder decides alone and nobody learns the other offers until the bids are opened. The common rule is first-price, where the highest bidder wins and pays exactly what they offered.

Economics lecture notes by Jonathan Levin at Stanford describe this as the sealed-bid, or first-price, auction. Because the winner pays their own bid, bidding your true value guarantees zero profit, so a bidder usually shades the offer below value, hoping to win at a profit, and shading too far risks losing to a rival.

The second-price version is called a Vickrey auction, in which the highest bidder still wins but pays the second-highest bid. Levin's notes show that bidding your true value is then a weakly dominant strategy, so there is no gain from shading.

This does not mean the seller earns less, because under a set of conditions the notes show that first-price and second-price auctions give the same expected revenue. Those conditions include independent private values drawn from the same distribution, with a bidder's payoff equal to value minus price, and real markets often break these assumptions.

Private values matter in the model: in Levin's setup each bidder knows their own value, and that value does not depend on what rivals know, whereas a buyer who is guessing the resale price of a shared asset faces a different problem, because rival information would change their estimate. Sealed bids suit sales where the seller wants one fair deadline and no live drama, and formats like this can appear in procurement, property sales and securities offerings, with the rules for each sale coming from its own documents.

The format also has limits, because bidders cannot learn from each other and a careless bidder may overpay. Collusion is harder to enforce but not impossible, and a seller must also protect the bids from leaks before opening.

The name can mislead: sealed does not mean first-price, and it does not mean the lowest bid wins. A tender for construction work may award to the lowest bid, while a sale of an asset usually awards to the highest, so read the notice for the rule.

Timing also matters, since a sealed offer is normally binding once the deadline passes and a bidder should check whether offers can be withdrawn, whether late offers are rejected and what happens in a tie. For a seller, the practical choice is not only the pricing rule.

Reserve prices, eligibility checks and clear instructions can change who bids. A rule that bidders cannot understand may reduce participation even if its theory is elegant.