GAMES AND STRATEGIES 2024

Week 9: Mechanism Design

Aim of the work:

• One-item auctions

• Multiple-item auctions

• Provision of a public good

• Buying a shortest path

Exercise 1. One item auctions. Four friends (that we will denote by A, B, C and D) have
to decide in which city they are going to spend the next holidays. They have to decide between
London, Amsterdam, Madrid. In order to decide it, they have written in the following table
their own valuations for each city. Each valuation is a number between 1 and 10 and a higher
evaluation corresponds to a more preferred city. The table is the following:
City A B C D
London 10 8 8 6
Amsterdam 9 6 10 6
Madrid 5 10 5 10

(a) Write the social welfare and find the optimal social choice.

(b) Use the VCG mechanism to run the auction and determine how much each one pays and
how much is the net final utility for each person.

Exercise 2. One item auctions. A building has five apartments, each one occupied by a
family. We denote the five families by A, B, C, D and E. They want to change the color of the
front of the building and they can choose between the colors: orange, yellow, red, gray, brown
and white. In order to decide, they have written in the following table their own valuations for
each colour. Each valuation is a number between 1 and 10 and a higher evaluation corresponds
to a more preferred colour. The table is the following:
Colour A B C D E
orange 10 2 8 4 5
yellow 3 6 3 9 10
red 1 7 5 10 7
gray 6 10 6 8 2
brown 4 3 10 9 7
white 6 8 5 9 7

(a) Write the social welfare and find the optimal social choice.

(b) Use the VCG mechanism to run the auction and determine how much each one pays and
how much is the net final utility for each person.

Exercise 3. Multiple item auctions. Five identical items are auctioned among 5 play-
ers. The marginal valuation for each additional item received by each player are shown in the
following table:

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 P1 P2 P3 P4 P5
5 7 10 5 4
4 6 2 3 2
3 1 2 2 1
2 1 1 1 0
1 1 1 1 0

(a) How one has to split the items among players in order to maximize the social welfare?

(b) Use the VCG mechanism to run the auction and determine how much should each one
pay, and what is their net final utility.

Exercise 4. Multiple item auctions. Suppose that 3 players compete in an auction for 5
identical items. Assume that they report the following true marginal valuations:

Player 1: (7, 2, 0, 0, 0)
Player 2: (5, 3, 2, 1, 0)
Player 3: (6, 6, 6, 1, 1)

(a) How one has to split the items among players in order to maximize the social welfare?

(b) Use the VCG mechanism to run the auction and determine how much should each one
pay, and what is their net final utility.

Exercise 5. Provision of a public good. The Mayor of a certain city has to decide whether
to construct a new underground station. The Mayor decides for a VCG mechanism: she asks
the citizens how do they value the presence of the new station. Assume that the number of
citizens is 104 and that the capital needed to for the construction of the station is c = 2 × 106 .
Describe what would be the outcome in the following scenarios.

(a) All the citizens report that they will get a benefit of 10.

(b) All the citizens report that they will get a benefit of 200.

(c) All the citizens report that they will get a benefit of 1000.

(d) 50% the citizens report that they will get a benefit of 10, while 50% the citizens reports a
benefit of 1000.

(e) 99% the citizens report that they will get a benefit of 0, while 1% the citizens reports a
benefit of 20100.

Exercise 6. Provision of a public good. The boss of a company wants to buy a new coffee
machine for an office where there are 10 employees. The boss decides to use a VCG mechanism:
she asks the employees how do they value the presence of the new coffee machine whose cost is
100 euro. Describe what would be the outcome in the following scenarios:

(a) All the employees report that they will get a benefit of 5.

(b) All the employees report that they will get a benefit of 10.

(c) All the employees report that they will get a benefit of 50.

(d) 50% the employees report that they will get a benefit of 1, while 50% the employees reports
a benefit of 50.

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 (e) 90% the employees report that they will get a benefit of 0, while 10% the employees reports
a benefit of 101.
Exercise 7. Buying a shortest path. A public institution needs to construct a route from O
to D (see Figure 1). Each segment is owned by a different landlord. Each landlord communicates
to the institution her valuation of her own segment (the weights in the graph in Figure 1). The
institution decides which segments to buy to construct the route O-D and how much to pay the
landlords accordingly to VCG mechanism.
(a) Which segments will be bought?

(b) How much each landlord will be paid?

Figure 1

Exercise 8. Buying a shortest path. A public institution needs to construct a route from O
to D (see Figure 2). Each segment is owned by a different landlord. Each landlord communicates
to the institution her valuation of her own segment (the weights in the graph in Figure 2). The
institution decides which segments to buy to construct the route O − D and how much to pay
the landlords accordingly to VCG mechanism.
(a) Which segments will be bought?

(b) How much each landlord will be paid?

Figure 2