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A Modified English Auction

Filippo Balestrieri
MIT
HP Lab
The Setting
 We consider a general Informed Principal
Problem in the context of procurement.
 n potential suppliers. Each one of them
privately informed about his cost of
production
 One buyer. The buyer privately knows how
each supplier’s product fits her requirements
The Problem
 Optimal Mechanism
 Implementation Problem

-Simplicity
-Buyer’s Privacy
-Dynamic Consistency
 Modified English Auction
Related Literature
 Informed Principal Problem: Myerson
(83), Maskin Tirole (90, 92)
 Scoring Auctions: Che (93), Asker
Cantillon (05)
 Strategic Use of Private Information in
designing the optimal mechanism:
Ganuza (99), Rezende (06), Skreta (07)
The Environment
 One good procurement auction
 IPV (a’ la Maskin Tirole 90)
 cost of production of supplier i
ci ~ Fi [ci , ci ]

 supplier i’s suitability parameter


ei ~ Gi ei , ei 
The Environment
 Supplier i’s utility
U i  xi  pi ci
 Buyer’s utility
 
U B  pe   xi  1   pi e0  x0 
i  i 
Informed Principal Problem
 Multistage Game
 Each player (buyer and suppliers)
discovers his type
 The buyer (the principal) chooses a
mechanism
 The mechanism is implemented
Optimal mechanism
 Allocation rule
Fi ci  Fi ci  F j c j 
pi c, e   1 if ei  ci   e0  x0 and ei  ci   ej  cj  j  i
f i ci  f i ci  f j c j 
pi c, e   0 otherwise
Optimal mechanism
 Payment rule
xi c, e  ci if pi c, e  1
xi c, e  0 if pi c, e  0

where c i is the maximum cost reporting
which bidder i would still win the auction.
Optimal mechanism
 Equivalent to the optimal mechanism
in an environment with common
knowledge of ei ' s
 Proof

- Extension of Maskin Tirole (90)


fictitious market of slacks
Implementation Problem
 Simplicity
-A mechanism is simple if it is anonymous
and universal (Wilson 87)
Anonymous: the rules do not depend on
the identity of the bidders
Universal: the rules do not depend on
details of the specific good that is the
object of the procurement
Implementation Problem
 Privacy
The buyer wants to conceal the values of
the suitability parameters
 Dynamic Consistency

A mechanism is dynamic inconsistent if


the decision maker wants to change its
rules at different point of time
Modified English Auction
(The Rules)
 First round
The buyer makes an offer to each
potential supplier. Those who accept the
starting offer participate to the auction
 From the second round on
The buyer chooses a temporary winner,
and makes new offers to the other
active suppliers (temporary losers).
Modified English Auction
 The new offers decrease by a constant,
small, discrete amount epsilon at each
round.
 If a supplier accepts the offer, he moves
to the following round; if he refuses, he
drops out of the auction.
Modified English Auction
 Each potential supplier gets to know
privately his personal offer, and if he is
a temporary winner or not.
 Everyone knows how many competitors
are still active, but not their identities.
Modified English Auction
 The auction ends when no temporary
losing supplier accepts his new offer.
 The temporary winner becomes the
final winner and gets paid the last offer
he received.
Modified English Auction
(The equilibrium)
 Each supplier i accepts all offers that
are weakly higher than his cost of
production
 The buyer first offer to supplier i is
b i  J i ei  e0  c0 
1 1

where
Fi  x 
J i x   x 
f i x 
Modified English Auction
 At each round t, the buyer chooses the
supplier who guarantees hers the
highest marginal utility

arg max ei  bi 
 
Fi bi
t

 
t
t
iN f i bi
Modified English Auction
 The payment the winner gets is equal
to his standing bid
bT 1
w  Jw
1
ew  e2h  J 2h c2h   cw*
Remarks
The Modified English Auction is
 simple

 privacy preserving for the buyer

 dynamic consistent
Remarks
 The mechanism inherits from the
English Auction the fact that the buyer
(the auctioneer) makes a sequence of
offers. However, the offers are not open
and direct to the general audience, but
confidential and specific to each
supplier.
Remarks
 Deferred Acceptance Algorithm
 Multi-party simultaneous bargaining