Auctions

FAISAL SHABBIR
 What is an auction?
• Much broader than the “common-sense”
definition.
– eBay is only one type of auction.
• An auction is a negotiation mechanism where:
– The mechanism is well-specified (it runs according to
explicit rules)
– The negotiation is mediated by an intermediary
– Exchanges are market/currency-based
 Mediation
• In a traditional auction, the mediator is the
auctioneer.
• Manages communication and information
exchange between participants.
• Provides structure and enforcement of rules.
• The mediator is not an agent or a participant
in the negotiation.
– Think of it as an automated set of rules.
 Types of auctions
• Open vs sealed-bid
– Do you know what other participants are bidding?
• One-sided vs. two-sided
– Do buyers and sellers both submit bids, or just buyers?
• Clearing policy
– When are winners determined (occasionally,
continuously, once?)
• Number of bids allowed
– One, many?
 Some classic auction types
• English outcry auction
• This is the auction most people are familiar with.
• One-sided (only buyers bid)
• Bids are publicly known
– Variant: only highest bid is known.
• Bids must be increasing
• Auction closes when only one bidder is left.
 Some classic auction types
• Dutch outcry auction
• Used to sell tulips in Dutch flower markets.
– Closes quickly.
• One-sided (only buyers bid)
• Bids are publicly known
• Bids must be decreasing
– Auctioneer starts at max, lowers asking price until
someone accepts.
• Auction closes when anyone accepts.
 Some classic auction types
• Vickrey auction.
• One-sided (only buyers bid)
• Bids are publicly known
– Turns out not to matter whether bids are secret.
• Highest bid receives the good, pays second-
highest bid.
• Has the nice property that truth-telling (bidding
your actual valuation) is a dominant strategy.
 Some classic auction types
• First-price sealed-bid
• This is how houses, construction bids, etc are sold.
• One-sided (only buyers bid)
• Bids are hidden; each buyer bids in secret.
• Everyone bids once.
• Highest (or lowest) bidder wins.
• Bidder challenge: guessing the bids of other
buyers.
 Some classic auction types
• Continuous double auction
• This is NASDAQ, NYSE, etc work
• Two-sided: Sellers and buyers both bid
• Matches are made continuously
• Matches are made based on the difference between
the “bid” price (willingness to pay) and the “ask”
price (amount seller wants)
• Bidder challenge: guessing future movement of
clearing prices.
 Auction (mechanism) properties
• When choosing an auction type, one might
want:
– Efficiency
• Agents with the highest valuations get the goods.
• If not, expect an aftermarket to develop.
– Incentive Compatibility
• The optimal strategy is to bid honestly
• Easy for participants – no need to counterspeculate
• Easy to determine the efficient allocation.
 Auction (mechanism) properties

• How is surplus distributed?

– Which consumers are happiest?
• Who pays transaction costs? How much are
they?
• Can the mechanism be manipulated by
coalitions?
• How long does it take to close?
– Can is be guaranteed to close in finite time?
 Valuation of goods
• Items to be auctioned can be:
– Private value/independent value
• The amount a person is willing to pay does not
depend upon how much others will pay.
• Item will be consumed/used rather than resold
– Electricity, computational resources, food
– Common value
• The amount a person is willing to pay depends upon
the value others place on the good
• Item is bought as an investment
– Stock, gold, antiques, art, oil prospecting rights
 Valuation of Goods
• Items to be auctioned can be:
– Correlated value
• Some private valuation and some common value
• Item may have network effects – e.g. VCRs,
computers.
• Item may provide both value and investment – some
artwork or collectibles.
– Challenge with correlated/common value
goods: Estimating what others will pay.
 The Winner’s Curse
• Correlated and common-value auctions can lead to
a paradox known as the Winner’s Curse.
• In a first-price auction, the winner knows that
he/she paid too much as soon as the auction is
over.
– No one else would buy at that price.
• Assumption: everyone has the same information.
– Applicable to prospecting, buying companies, signing
free agents, investing in artwork, etc.
 English Auctions
• These are the most common auctions in
practice.
• Bids ascend, winner gets the item at the
price she bid.
• Optimal strategy, bid $0.01 more than the
next highest person.
 English Auctions
• In an open outcry auction, this is easy.
– Just keep going until no one else is bidding.
– For the seller to be happy, there must be enough
competition to drive up bids.
– Open outcry can also reveal information to others.
• This may be a problem.
– Can also encourage collusion
• Bidders agree to keep prices low, possibly reselling later.
 English Auctions
• In sealed-bid auctions, selecting a bid price
is a serious problem.
– Need to guess what others will bid, and what
they think you will bid, etc.
• Problem: item may not actually go to the
bidder who values it most.
 Dutch auctions
• Start at max, auctioneer gradually decreases
bid.
• Strategy: bid $0.01 above what the next
highest person is willing to pay.
• Equivalent in terms of revenue to a first-
price auction.
• Has the advantage of closing quickly.
 Vickrey auctions
• In a Vickrey auction, the highest bid wins,
but pays the second-highest price.
• If goods are privately valued, it is a
dominant strategy for each participant to bid
their actual valuation.
– Prevents needless and expensive
counterspeculation
– Ensures that goods go to those who value them
most.
 Example: Vickrey auction
• Highest bidder wins, but pays the second highest price.

$5 $3 $2

It is a dominant strategy for each agent to bid his/her

actual valuation.
Homer wins and pays $3
 Example: Vickrey auction
• Highest bidder wins, but pays the second highest price.
Homer: $5, Bart $3, Lisa $2
Overbids Underbids

Homer No change No change or loss

No change
Lisa/Bart or overpay
No change

It is a dominant strategy for each agent to bid his/her

actual valuation.
Homer wins and pays $3
 Using Auctions for Scheduling
• Auctions can be used for lots more than just
buying beanie babies on eBay.
• A new and popular approach is to use
auctions for allocation of resources in a
distributed system.
– Electric power in Sweden
– Computational resources (disk, CPU,
bandwidth)
• This approach is called market-oriented
programming.
 Market-oriented scheduling
• Appeal: if assumptions are met, we can find
the optimal schedule.
• Participants in the system have no incentive
to misrepresent the importance of their job.
• Much of the computation is decentralized
– Since scheduling is often NP-complete, we’d
like to avoid having a single process find a
solution.
 Scheduling example
• Consider a schedule with 8 1-hour slots from
8am to 4 pm
– Each slot has a reserve price = $3
• This is the cost needed to run the machine for an hour.
• Bids must meet or exceed reserve.
– 4 agents have jobs to submit.
• Agent 1: 2 hours (consec.), value $10, deadline: noon
• Agent 2: 2 hours (consec), value $16, deadline: 11am
• Agent 3: 1 hour, value $6, deadline 11 am.
• Agent 4: 4 hours (consec), value $14.5, deadline 4pm
 Scheduling Example
• We cannot satisfy all agents
– 9 hours needed in an 8 hour day.
• We would like to schedule the most
valuable jobs.
• We need to accurately know which jobs are
the most valuable.
– Everyone thinks their job is the most important.
• This is the same as maximizing revenue in
an auction.
 Scheduling Example
• We use a Vickrey auction to allocate slots.
– Each agent will bid their actual valuation for
the slots.
• No incentive to counterspeculate.
– Agent 1 will bid $10 for any two slots before noon.
– Agent 2 will bid $16 for any two slots before 11 am.
– Agent 3 will bid $6 for any one slot before 11am.
– Agent 4 will bid $14.50 for any four slots.
• So what is the solution?
 Scheduling Example - solution
• Let’s start with afternoon
– Only agent 4 is interested, so he gets the four afternoon
slots at reserve price + 0.25 (minimum bid)
– Gets slots for $13, which is less than the value of the
job, so he’s happy.
• Morning
– Agent 1 bids $16 for two slots ($8 per) – no one else
can beat this, so he’ll get two slots (8am & 9am) at the
second price.
– But what is the second price?
 Scheduling Example - solution
• Agent 2’s bid:
– price(s1) + price(s2) = 10, price(s2) >= $3.25
– Since no one else wants s2, agent 2 can have s2 for $3.25. This
means his bid for s1 is $6.75
• Agent 3 bids $6 for s1
• We now have 3 resources and 4 bids.
• The first three slots are allocated at $6.25 apiece,
and the remainder at $3.25
• This is an equilibrium
– At these prices, no one wants to change their allocation.
– The most valuable jobs are scheduled – we’ve maximized global
performance.
– Each agent had no incentive to “cheat the system”
 Double Auctions
• In a double auction, both buyers and sellers
select bids.
• Most often, these auctions are continuous
– Any time there is a possible match, it is made.
• The NYSE, NASDAQ, most futures
markets work this way.
 Double Auctions
• Prices are represented as a bid/ask spread
• This is the highest unmet bid to buy, and the
lowest unmet bid to sell.
• Example:
– buy: 34, 36, 40, 47, 48
– sell: 50,52, 55, 60
– Bid/ask spread = 48-50
• Any “buy” greater than 50, or any sell less than 48
will close immediately.
• In theory, the market will converge to an
equilibrium.
 Combinatorial auctions
• In all the problems we’ve seen so far, a
single good is being sold.
• Often, a seller would like to sell multiple
interrelated goods.
– FCC spectrum is the classic example.
– Bidders would like to bid on combinations of
items.
• “I want item A, but only if I also win the auction for
item B.”
 Combinatorial auctions
• If we sell each good in a separate auction,
agents have a hard bidding problem.
– I don’t want to win only A, so I need to
estimate my chances of winning B.
• We might also let people place bids on
combinations of goods.
– Problem: determining the winner is NP-hard.
– Determining what to bid is at least that hard.
• Compromise: allow restricted combinations
of bids. (e.g. only XOR)
Combinatorial auctions in real life
• In 1994, the FCC began auctioning of
license for portions of the EM spectrum
– Cellphone coverage, radio and television,
wireless communication, etc.
• Large complementarities exist.
– A given frequency in San Francisco is more
valuable if Cingular also has the same
frequency in Los Angeles.
Combinatorial auctions in real life
• Many billions of dollars at stake
– $22.9 B between 1994 and 1998.
– Companies have a large incentive to “cheat”
– FCC would (in theory) like to maximize
revenue and efficiency.
• Can’t actually do both
– Values are correlated
• Firms have their own interest, plus a concern for the
“market value” of a particular region.
Combinatorial auctions in real life
• The FCC conducted a series of
simultaneous multiple-round open single-
good auctions.
– Too complex to auction everything at once.
– Still want bidders to get efficient combinations.
– Helps bidders determine how valuable a license
is.
– Bidders could withdraw
• Allowed them to try to get complementary
frequencies without undue risk
Combinatorial auctions in real life
• Problems
– Collusion – bidders would buy arbitrarily, move across
the street, and reallocate.
– Code bidding. Bidders would use bids to indicate to
competitors which markets they wanted.
• Sprint wants a freqency in Northern Ca (zone 37)
• Cingular really needs a certain frequency in NYC
• When Cingular starts bidding up the price in Northern CA,
Sprint submits a high bid in NYC: $24,000,000,037
• The message: if you stay in zone 37, we’ll bid up the price
here.
• Expensive NYC bid then withdrawn by Sprint
Combinatorial auctions in real life
• Code bidding also used to signal markets a
buyer particularly wants.
– Bid in a rival’s market; when they back out of
yours, withdraw.
• Solution: hide identity of bidders
– Bidders used telephone keypad numbers to
identify themselves.
• TDS ended bids in 837
Combinatorial auctions in real life
• FCC responses
– Click-box bidding. Bidder chooses a market, their bid is
one increment more than highest.
– Limit the number of withdrawals
• Only two rounds allowed.
– Set high reserve prices
• Less temptation to collude
– Encourage small-firm competition
• Provide credits/assistance to smaller businesses
• More competition means less collusion
– Stagger closing times
• Once an auction has closed ,the winner is safe from retaliatory
bidding.
 Summary
• There are a great variety of auction types
– Features can be selected to achieve the desired
outcomes.
• In private-value auctions, a Vickrey auction has
the desirable property of incentive compatibility.
– This makes it attractive for scheduling and resource
allocation in CS problems
• Combinatorial auctions present a new suite of
challenges
– Complementarity, collusion, tractability.
• Auctions are one of the “hottest” research topics