The Vickrey auction and why we're using it

Keycult is gearing up for our third release in 2019, the No. 1 Rev. 1. Our past sales have been a combination of First Come, First Served (FCFS) and raffle, with a roughly even split between the two. This time, we’re trying something new: while most will be sold in a raffle, up to ten boards will be sold in a Vickrey auction.

 

What is a Vickrey auction?

For a single item, a Vickrey auction is an aucton where participants submit bids privately and the winner pays the price set by the second highest bidder. In our case, the top ten bidders would pay the price set by the eleventh highest bidder.

Example top bids
#1 - $900
#2 - $850
#3 - $850
#4 - $825
#5 - $800
#6 - $800
#7 - $775
#8 - $750
#9 - $710
#10 - $700
#11 - $650 ← The top 10 each pay $650

Your bid represents the maximum amount you are willing to pay, but the actual sale price is determined by the other participants. In the example above, even though #1 bid $950, they only paid $650. This is the market price: the price at which there are enough buyers willing to pay for the item.

Our auctions will take place as the last step of a release, after any FCFS sales or raffles. People can use this auction as another chance to win a board they really want and support Keycult without having to resort to the aftermarket.

 

Why are we doing this?

Demand for our boards is currently much higher than our supply. While we are increasing the number of kits available, we do not anticipate keeping up with demand in the near future. This leads to an aftermarket where kits sell for dramatically more than what we charge. Contrary to what some may think, we do not have any ill-will towards people who resell Keycult kits for profit. But if we could capture some of that profit, it would bring us closer to becoming a sustainable, long-term business.

To that end, we think a Vickrey auction will have a couple of key benefits:

  • Those willing to spend significantly more for a kit will be able to purchase one through the auction instead of through the aftermarket, benefiting Keycult financially.
  • The auction takes top spenders out of the market, making it less attractive for people to enter the main sale with the intent to resell their kit for profit. This should improve chances for those who would actually build and use their kit.

 

…but what about X?

We’ve been a part of a number of conversations and debates about Vickrey auctions over the last few weeks. This has given us some insight into the questions people have — we’ll address some common ones.

Why don’t you increase prices?
We currently set prices based on measurable things: the cost of manufacturing, the time it takes us to fulfill an order, the opportunity cost of making keyboards instead of a (normal) job. We could increase prices to better represent some estimated “market value,” but we’ll very likely be wrong about what that value is. Vickrey auctions are the opposite of an estimate. They are a mechanism to find the market-clearing price of an item. Everyone who wins in the auction pays at or less than their bid and we don’t have to introduce guesswork into our pricing.

Why don’t you make enough keyboards to meet demand?
Simply put, we don’t believe we can. (Yet.) We care deeply about quality and we put a lot of time and care into checking, assembling, and fulfilling boards. We are increasing volume steadily so that we can address challenges incrementally without being overwhelmed. Meeting current demand would require multiple times as many boards, and we’re not prepared to handle the logistics of such a large run. While increased volume may be a better long-term solution, it will be some time before we get there.

Won’t this set a floor for aftermarket prices, making kits even more difficult to buy?

To the degree that a single sale can “set” an aftermarket price, the Vickrey auction will set it more appropriately and accurately than if it weren’t run. Consider our running example: the ten winners of the Vickrey auction pay the price of the eleventh highest bidder. The very top bidders are outliers — they’re willing to pay significantly more than even the rest of the winners. Without the auction, those outliers would be the first to buy kits on the aftermarket, creating the impression that the market value is much higher than it truly is. In contrast, the Vickrey auction sale price cannot be influenced by just a few outliers and the price is only set to an amount that at least ten people are willing to pay.

 

An experiment

We’re treating this as an experiment to see whether we can capture more of the aftermarket value generated by our boards. We believe Vickrey auctions will be a useful tool, but we’re eager to hear feedback and see how things go in practice. If you have thoughts you’d like to share, we’d love to hear from you in the Keycult Discord server.

The No. 1 Rev. 1 will be the first board sold in this way — you can learn more about it here.