Auction theory is a branch of applied economics that deals with how bidders act in auctions and researches how the features of auctions incentivise predictable outcomes. Auction theory is a tool used to inform the design of real-world auctions. Sellers use auction theory to raise higher revenues while allowing buyers to procure at a lower cost. The confluence of the price between the buyer and seller is an economic equilibrium. Auction theorists design rules for auctions to address issues that can lead to market failure. The design of these rulesets encourages optimal bidding strategies in a variety of informational settings. The 2020 Nobel Prize for Economics was awarded to Paul R. Milgrom and Robert B. Wilson "for improvements to auction theory and inventions of new auction formats."

Auctions facilitate transactions by enforcing a specific set of rules regarding the resource allocations of a group of bidders. Theorists consider auctions to be economic games that have two aspects: format and information. The format defines the rules for the announcement of prices, the placement of bids, the updating of prices, when the auction closes, and the way a winner is picked. The way auctions differ with respect to information regards the asymmetries of information that exist between bidders. In most auctions, bidders have some private information that they choose to withhold from their competitors. For example, bidders usually know their personal valuation of the item, which is unknown to the other bidders and the seller; however, the behaviour of bidders can influence valuations by other bidders.

A purportedly historical event related to auctions is a custom in Babylonia, namely when men make an offers to women in order to marry them. The more familiar the auction system is, the more situations where auctions are conducted. There are auctions for various things, such as livestock, rare and unusual items, and financial assets.

Non-cooperative games have a long history, beginning with Cournot's duopoly model. A 1994 Nobel Laureate for Economic Sciences, John Nash, proved a general-existence theorem for non-cooperative games, which moves beyond simple zero-sum games. This theory was generalized by Vickrey (1961) to deal with the unobservable value of each buyer. By the early 1970s, auction theorists had begun defining equilibrium bidding conditions for single-object auctions under most realistic auction formats and information settings. Recent developments in auction theory consider how multiple-object auctions can be performed efficiently.

There are traditionally four types of auctions that are used for the sale of a single item:

Most auction theory revolves around these four "basic" auction types. However, other types have also received some academic study (see Auction § Types). Developments in the world and in technology have also influenced the current auction system. With the existence of the internet, online auctions have become an option.

There are six basic activities that complement the auction-based trading process:

The auction envelope theorem defines certain probabilities expected to arise in an auction.