Auction Variant

It has been shown that to optimize the revenue of an auctionor in a blind, one-bid-only, auction, the best strategy is to announce in advance that the item will be sold to the highest bidder at the SECOND highest price!

Explain why. Now explain why very few sealed bid auctions are run this way.

Everyone is willing to bid slightly higher than they are actually willing to spend when they know they will be paying a slightly lower price. It is common sense as well as game theory.

But people like auctions to be simple rather than complicated, and regardless of auctioneer preference, you probably have more participants (and thus higher revenue) when you have simpler rules. I have no idea whether it actually works out this way or is just auction runner paranoia, but it is possible that the extra money you would make by using more ideal but complicated/rare rules is dwarfed by the amount of money you would lose because of lowered participation resulting in a lower highest bid.

Of course if this sort of auction became more common, it would generally have more participation because everyone would already be familiar with the rules, so it is a bit of a catch 22.