A second-price auction is a type of auction where the highest bidder wins but pays the price of the second-highest bid. This format encourages bidders to bid their true value for the item, as they know they will not pay more than what the next highest bidder is willing to pay. In a second-price auction, bidders submit their bids without knowing what others have offered. Once all bids are in, the highest bid wins, but the winner only pays the amount of the second-highest bid. This system aims to create a fair bidding environment and reduce the incentive for bidders to underbid.