Market design

Other auction and market design (without abstracts)

“Demand Reduction and Inefficiency in Multi-Unit Auctions,” (with Lawrence M. Ausubel, Marek Pycia, Marzena Rostek, and Marek Weretka) Working Paper, University of Maryland, March 2014.

“Applicant Auctions for Top-Level Domains: Resolving Contention Fairly, Efficiently and Transparently,” November 2012.

“Applicant Auctions for Internet Top-Level Domains: Resolving Conflicts Efficiently” (with Ulrich Gall, Pacharasut Sujarittanonta, and Robert Wilson), Working Paper, University of Maryland, January 2013. [PresentationShort Version]

“Fear of Losing in a Clock Auction” (with Emel Filiz-Ozbay, Erkut Y. Ozbay, and Pacharasut Sujarittanonta), Review of Economic Design, 16:2-3, 119-134, 2012.

US Patent No. 8,224,743, “System and Method for a Hybrid Clock and Proxy Auction” (with Lawrence M. Ausubel and Paul Milgrom) issued July 17, 2012.

US Patent No. 8,145,555, “System and Method for the Efficient Clearing of Spectrum Encumbrances” (with Lawrence M. Ausubel and Paul Milgrom) issued March 27, 2012.

“Comparison of Auction Formats for Auctioning Wind Rights” (with Lawrence M. Ausubel) Power Auctions Report for the Bureau of Ocean Energy Management, September 2011.

 “Multiple Factor Auction Design for Wind Rights” (with Lawrence M. Ausubel) Power Auctions Report for the Bureau of Ocean Energy Management, September 2011.

“Auction Design for Wind Rights” (with Lawrence M. Ausubel) Power Auctions Report  for the Bureau of Ocean Energy Management, August 2011.

“Discrete Clock Auctions: An Experimental Study” (with Emel Filiz-Ozbay, Erkut Y. Ozbay, and Pacharasut Sujarittanonta), Experimental Economics, 15:2, 309-322, 2012.

US Patent No. 7,899,734 B2, “System and Method for an Auction of Multiple Types of Items” (with Lawrence M. Ausubel and Wynne P. Jones) issued March 1, 2011.

“Market Design: Harnessing Market Methods to Improve Resource Allocation,” White Paper, University of Maryland, October 2010.

“Auctioning Rough Diamonds: A Competitive Sales Process for BHP Billiton’s Ekati Diamonds” (with Samuel Dinkin and Robert Wilson). In the Handbook of Market Design, Nir Vulkan, Alvin E. Roth, and Zvika Neeman (eds), Oxford University Press. Chapter 12, 299-324, 2013.

US Patent No. 7,729,975, “System and Method for a Hybrid Clock and Proxy Auction” (with Lawrence M. Ausubel and Paul Milgrom) issued June 1, 2010.

“Pricing Rule in a Clock Auction” (with Pacharasut Sujarittanonta), Decision Analysis, 7, 40-57, 2010.

“How Best to Auction Natural Resources,” in Philip Daniel, Brenton Goldsworthy, Michael Keen, and Charles McPherson (eds.), Handbook of Oil, Gas And Mineral Taxation, Chapter 10, forthcoming, Washington, DC: IMF, 2009.

“Innovation and Market Design.” In Josh Lerner and Scott Stern (eds.), Innovation Policy and the Economy, Volume 9, National Bureau of Economic Research, 113-137, Chicago: University of Chicago Press, 2009.

“Market Design: Auctions and Matching.” In John Siegfried (ed.), Better Living Through Economics, Harvard University Press, 223-225, 2010.

“An Overview of Combinatorial Auctions” (with Yoav Shoham and Richard Steinberg), ACM SIGecom Exchanges, 7, 3-14, 2007.

“Market-Based Alternatives for Managing Congestion at New York’s LaGuardia Airport,” (with Michael O. Ball, Lawrence M. Ausubel, Frank Berardino, George Donohue, Mark Hansen, and Karla Hoffman), in Optimal Use of Scarce Airport Capacity, Proceedings of AirNeth Annual Conference, The Hague, April 2007.

Combinatorial Auctions, (with Yoav Shoham and Richard Steinberg) MIT Press, 2006.

“Introduction to Combinatorial Auctions,” (with Yoav Shoham and Richard Steinberg) in Peter Cramton, Yoav Shoham, and Richard Steinberg (eds.), Combinatorial Auctions, 1-13, MIT Press, 2006.

“The Clock-Proxy Auction: A Practical Combinatorial Auction Design,” (with Lawrence M. Ausubel and Paul Milgrom) in Peter Cramton, Yoav Shoham, and Richard Steinberg (eds.), Combinatorial Auctions, Chapter 5, 115-138, MIT Press, 2006. [Presentation]

“Dynamic Auctions in Procurement,” (with Lawrence M. Ausubel) in Nicola Dimitri, Gustavo Piga, and Giancarlo Spagnolo (eds.) Handbook of Procurement, Cambridge, England: Cambridge University Press, 2006.

“How Best to Auction Oil Rights,” in Macartan Humphreys, Jeffrey D. Sachs, Joseph E. Stiglitz (eds.), Escaping the Resource Curse, Chapter 5, 114-151, New York: Columbia University Press, 2007.

“Auctioning Many Divisible Goods,” (with Lawrence M. Ausubel) Journal of the European Economic Association, 2, 480-493, April-May 2004.

“Vickrey Auctions with Reserve Pricing,” (with Lawrence M. Ausubel) Economic Theory, 23, 493-505, April 2004. Reprinted in Charalambos Aliprantis, et al. (eds.), Assets, Beliefs, and Equilibria in Economic Dynamics, Berlin: Springer-Verlag, 355-368, 2003.

“Demand Reduction and Inefficiency in Multi-Unit Auctions,” (with Lawrence M. Ausubel) Working Paper, University of Maryland, July 2002. [Presentation]

“The Optimality of Being Efficient,” (with Lawrence M. Ausubel) Working Paper, University of Maryland, March 2001. [Presentation]

Maryland Auction Conference, May 29-31, 1998.

“Ascending Auctions,” European Economic Review, 42:3-5, 745-756, May 1998. [Presentation]

Dissolving a Partnership Efficiently,” (with Robert Gibbons and Paul Klemperer) Econometrica, 55, 615–632, 1987. Reprinted in Paul Klemperer (ed.), The Economic Theory of Auctions, Volume 2, Cheltenham, UK: Edward Elgar, 2000.


Other auction and market design (with abstracts)

“Demand Reduction and Inefficiency in Multi-Unit Auctions,” (with Lawrence M. Ausubel, Marek Pycia, Marzena Rostek, and Marek Weretka) Working Paper, University of Maryland, March 2014.

Auctions often involve the sale of many related goods: Treasury, spectrum and electricity auctions are examples. In multi-unit auctions, a bid for one unit may affect payments for other units won, giving rise to an incentive to shade bids differently across units. We establish that such differential bid shading results generically in ex post inefficient allocations in the uniform-price and pay-as-bid auctions. We also show that, in general, the efficiency and revenue rankings for the two formats are ambiguous. However, in settings with symmetric bidders, the pay-as-bid auction often outperforms. In particular, with diminishing marginal utility, symmetric information and linearity, it yields greater expected revenues. We explain the rankings through multi-unit effects, which have no counterparts in auctions with unit demands. We attribute the new incentives separately to multi-unit but constant marginal utility and diminishing marginal utility.

“Applicant Auctions for Top-Level Domains: Resolving Contention Fairly, Efficiently and Transparently,” November 2012.

The quest for new top-level domains took an important step last spring with 1930 applications to ICANN. 755 of these applications, coming from 145 different parties, are under contention as a result of multiple applications for the same string. ICANN has encouraged these applicants to resolve these contentions privately, and has established a last-resort auction in the event agreements among applicants cannot be reached. Here I describe a private auction model, the Applicant Auction, which I believe is the most efficient, fair and transparent approach to resolve contentions.

“Applicant Auctions for Internet Top-Level Domains: Resolving Conflicts Efficiently” (with Ulrich Gall, Pacharasut Sujarittanonta, and Robert Wilson), Working Paper, University of Maryland, January 2013. [PresentationShort Version]

The prospect of using auctions to resolve conflicts among parties competing for the same top-level internet domains is described. In such an auction the winner’s payment is divided among the losers, whereas if the conflict is not resolved then ICANN will conduct an auction and retain the winner’s payment. For first-price and second-price sealed-bid auctions, we characterize equilibrium bidding strategies and provide examples, assuming bidders’ valuations are distributed independently and are either symmetrically or asymmetrically distributed. The qualitative properties of equilibria reveal novel features; for example, in a second-price auction a bidder might bid more than her valuation in order to drive up the winner’s payment. Even so, examples indicate that in symmetric cases a bidder’s expected profit is the same in the two auction formats. We then test in the experimental lab two auction formats that extent the setting from a single domain to the actual setting with many domains. The first format is a sequential first-price sealed-bid auction; the second format is a simultaneous ascending clock auction. The framing and subjects were chosen to closely match the actual setting. Subjects were PhD students at the University of Maryland in Economics, Computer Science, and Computer Engineering, with training in game theory and auction theory. Each subject played the role of an actual company (e.g., Google) and bid for domains (e.g., .book) consistent with the company’s applications. Subjects were given instructions explaining the auction and the equilibrium theory for the single-item case in relevant examples. Both formats achieved auction efficiencies of 98% in the lab. This high level of efficiency is especially remarkable in the case with asymmetric distributions—the format performed better than the simple single-item equilibrium despite the presence of budget constraints in the lab. This experiment together with previous results on the robustness of ascending auctions in general and simultaneous ascending clock auctions in particular suggest that the simultaneous ascending clock auction will perform best in this setting.

“Fear of Losing in a Clock Auction” (with Emel Filiz-Ozbay, Erkut Y. Ozbay, and Pacharasut Sujarittanonta), Review of Economic Design, 16:2-3, 119-134, 2012.

We examine bidding behavior in a clock auction in which price is set by the lowest-accepted bid and provisional winners are reported each round (the LABpw auction). This format was used in the India 3G spectrum auction. In the standard theory, the auction performs poorly. In particular it yields lower revenues and is less efficient than the more standard clock auction with exit bids and highest-rejected-bid pricing (the HRB auction). However, the LABpw auction performs well in the lab, achieving higher revenues than the HRB auction. We show how fear of losing provides one motivation for the overbidding that causes higher revenues in the LABpw auction.

US Patent No. 8,224,743, “System and Method for a Hybrid Clock and Proxy Auction” (with Lawrence M. Ausubel and Paul Milgrom) issued July 17, 2012.

The present invention primarily concerns hybrid auctions that may, for example, combine a clock auction with a proxy auction. Hybrid auctions include multi-item auctions that comprise at least two phases of package auctions: an earlier phase in which bidders participate in a clock auction (or other dynamic auction); and a later phase in which bidders participate in a proxy auction (or some other package auction). By combining the earlier phase and the later phase as in some of the embodiments described herein, it is possible to combine the advantages of the dynamic auction and the advantages of the sealed-bid package auction. In particular, if the earlier phase is a clock auction and the later phase is a proxy auction, then the resulting hybrid auction will combine the transparency and simplicity of the clock auction with the efficient outcome and competitive revenues of the proxy auction.

US Patent No. 8,145,555, “System and Method for the Efficient Clearing of Spectrum Encumbrances” (with Lawrence M. Ausubel and Paul Milgrom) issued March 27, 2012.

The present invention is a system and method to sell or procure complementary goods. A complementary good according to the invention is a good whose value or utility is enhanced when paired with another good, such a pair of goods is a communications license to encumbered spectrum and a complementary clearing right to clear the spectrum of its encumbrance. The invention provides automated procedures to facilitate the fashioning and sale of clearing rights so as to enhance the value of the communications license.

“Comparison of Auction Formats for Auctioning Wind Rights” (with Lawrence M. Ausubel) Power Auctions Report  for the Bureau of Ocean Energy Management, September 2011.

The best sites for offshore wind farms on the US Outer Continental Shelf are scarce. To make the best use of this scarce resource, it is necessary to implement a fair and efficient mechanism to assign leases to companies that are most likely to develop off-shore wind energy projects. Coastal states, particularly along the eastern seaboard, are taking aggressive actions to spur the growth of an offshore wind sector in their states to help meet their renewable portfolio targets while nurturing the supporting on-shore infrastructure. This paper compares the various auction formats described in “Auction Design for Wind Rights” (Ausubel and Cramton 2011a), and the multiple factor considerations documented in “Multiple Factor Auction Design for Wind Rights” (Ausubel and Cramton 2011b). The paper describes in further detail four different clock auction designs for auctioning these alternative energy leases and highlights considerations that should be factored into the auction rules.

“Multiple Factor Auction Design for Wind Rights” (with Lawrence M. Ausubel) Power Auctions Report  for the Bureau of Ocean Energy Management, September 2011.

The best sites for offshore wind farms on the US Outer Continental Shelf are scarce. To make the best use of this scarce resource, it is necessary to implement a fair and efficient mechanism to assign wind rights to companies that are most likely to develop off-shore wind energy projects. Coastal states, particularly along the eastern seaboard, are taking aggressive actions to spur the growth of an offshore wind sector in their states to help meet their renewable portfolio targets while nurturing the supporting on-shore infrastructure. This paper discusses the design of multi-factor auctions for wind rights, in which multiple factors are used in bid evaluation. This may be especially useful in settings where states (and potential bidders) have already taken actions to foster offshore wind development. The paper complements Ausubel and Cramton (2011) on the design of price-only auctions for wind rights.

“Auction Design for Wind Rights” (with Lawrence M. Ausubel) Power Auctions Report  for the Bureau of Ocean Energy Management, August 2011.

The best sites for offshore wind farms on the US Outer Continental Shelf are scarce. To make the best use of this scarce resource, it is necessary to implement a fair and efficient mechanism to assign wind rights to companies that are most likely to develop off-shore wind energy projects. Coastal states, particularly along the eastern seaboard, are taking aggressive actions to spur the growth of an offshore wind sector in their states to help meet their renewable portfolio targets while nurturing the supporting on-shore infrastructure. This paper discusses the design of auctions for wind rights in which price is the sole factor of competition. A second paper, Ausubel and Cramton (2011), extends the analysis to auctions in which multiple factors are used in bid evaluation. This may be especially useful in settings where states (and potential bidders) have already taken actions to foster offshore wind development.

“Discrete Clock Auctions: An Experimental Study” (with Emel Filiz-Ozbay, Erkut Ozbay, and Pacharasut Sujarittanonta), Experimental Economics, 15:2, 309-322, 2012.

We analyze the implications of different pricing rules in discrete clock auctions. The two most common pricing rules are highest-rejected bid (HRB) and lowest-accepted bid (LAB). Under HRB, the winners pay the lowest price that clears the market; under LAB, the winners pay the highest price that clears the market. In theory, both the HRB and LAB auctions maximize revenues and are fully efficient in our setting. Our experimental results indicate that the LAB auction achieves higher revenues. This revenue result may explain the frequent use of LAB pricing. On the other hand, HRB is successful in eliciting true values of the bidders both theoretically and experimentally.

US Patent No. 7,899,734 B2, “System and Method for an Auction of Multiple Types of Items” (with Lawrence M. Ausubel and Wynne P. Jones) issued March 1, 2011.

An improved system and method for a computer-implemented auction in which multiple types of items are auctioned together without imposing a particular division of supply or demand among the individual types of items. In some embodiments the auction of the present invention provides a means or method for establishing prices for the types of items, wherein the prices maintain a relationship. In other embodiments, the present invention provides a means or method for implying prices from price parameters in the bids received form bidders, based on a relation among the prices for the types of items. Market clearing may be defined by the condition that the aggregate quantity bid for all types of items is less than or equal to the available quantity of all types of items. The division among the types of items within is thus determined flexibly, based on the bids at the associated prices. In other embodiments, market clearing is defined by the condition that the quantity bid for one selected type of item is less than or equal to the available quantity of the selected type of item. The quantities of the other types of items are thus determined flexibly, based on the bids at the associated prices.

“Market Design: Harnessing Market Methods to Improve Resource Allocation,” White Paper, University of Maryland, October 2010.

The emerging field of market design applies auctions and matching to solve resource allocation problems. This paper focuses on auction design, the branch of market design where money is used to facilitate the exchange of goods and services. Within auctions, the paper examines applications involving government regulated resources. Who should use the scarce radio spectrum and at what prices? How should electricity markets be organized? How should financial markets be regulated? And how should runway access be assigned at congested airports? All of these are important questions in major industries. Researchers in market design have made substantial progress in answering these questions over the last fifteen years. The efforts, although at the forefront of theory have been closely tied to practice, and involved interdisciplinary teams of economists, computer scientists, and engineers, all working to solve real problems. Despite this rapid progress, the field holds much promise to provide better answers in even more complex economic environments over the next two decades. The rewards to society from improved markets will be immense.

“Auctioning Rough Diamonds: A Competitive Sales Process for BHP Billiton’s Ekati Diamonds” (with Samuel Dinkin and Robert Wilson). Forthcoming in the Handbook of Market Design, Zvika Neeman, Al Roth, and Nir Vulkan (eds), Oxford University Press. January 2013.

We describe a new approach for selling rough diamonds through competitive auctions. The classical approach of De Beers—giving each customer a bag of stones and a take-it-or-leave-it price—worked well in near monopoly circumstances, but is ill-suited for competitive producers. Competitive producers, like BHP Billiton, benefit from getting the diamonds to those who value them the most. Beginning in 2008, BHP Billiton introduced a simple auction process to assign its Ekati diamonds to the highest bidders at competitive market prices. A Spot auction, ten times per year, is used to establish prices for each of nineteen deals of diamonds grouped by size, color, and quality. A Term auction allows customers to lock in a long-term supply commitment at prices indexed to future Spot auctions. A Specials auction, two or three times per year, prices large stones. The auctions use an ascending-clock format in which prices increase for each product until there is no excess demand. This approach allows customers to discover market prices, while managing portfolio and budget constraints. The approach has proven remarkably successful in pricing and allocating the mine’s output even in the face of the global financial crisis.

US Patent No. 7,729,975, “System and Method for a Hybrid Clock and Proxy Auction” (with Lawrence M. Ausubel and Paul Milgrom) issued June 1, 2010.

The present invention primarily concerns hybrid auctions that may, for example, combine a clock auction with a proxy auction. Hybrid auctions include multi-item auctions that comprise at least two phases of package auctions: an earlier phase in which bidders participate in a clock auction (or other dynamic auction); and a later phase in which bidders participate in a proxy auction (or some other package auction). By combining the earlier phase and the later phase as in some of the embodiments described herein, it is possible to combine the advantages of the dynamic auction and the advantages of the sealed-bid package auction. In particular, if the earlier phase is a clock auction and the later phase is a proxy auction, then the resulting hybrid auction will combine the transparency and simplicity of the clock auction with the efficient outcome and competitive revenues of the proxy auction.

“Pricing Rule in a Clock Auction” (with Pacharasut Sujarittanonta), Decision Analysis, 7, 40-57, 2010.

We analyze a discrete clock auction with lowest-accepted bid (LAB) pricing and provisional winners, as adopted by India for its 3G spectrum auction. In a perfect Bayesian equilibrium, the provisional winner shades her bid while provisional losers do not. Such differential shading leads to inefficiency. The size of the inefficiency declines with smaller bid increments. An auction with highest-rejected bid (HRB) pricing and exit bids is strategically simple, has no bid shading, and is fully efficient. In addition, it has higher revenues than the LAB auction, assuming profit maximizing bidders. The bid shading in the LAB auction exposes bidders to the possibility of losing the auction at a price below the bidder’s value. Thus, fear of losing may cause bidders in the LAB auction to bid more aggressively than predicted assuming profit-maximizing bidders. We extend the model by adding an anticipated loser’s regret to the payoff function. Revenue from the LAB auction yields higher expected revenue than the HRB auction when bidders’ fear of losing at profitable prices is sufficiently strong. This would provide one explanation why India, with an expressed objective of revenue maximization, adopted the LAB auction for its upcoming 3G spectrum auction, rather than the seemingly superior HRB auction.

“How Best to Auction Natural Resources,” in Philip Daniel, Brenton Goldsworthy, Michael Keen, and Charles McPherson (eds.), Handbook of Oil, Gas And Mineral Taxation, Chapter 10, forthcoming, Washington, DC: IMF, 2009.

I study the design of auctions of natural resources, such as oil or mineral rights. A good auction design promotes both an efficient assignment of rights and competitive revenues for the seller. The structure of bidder preferences and the degree of competition are key factors in determining the best design. With weak competition and simple value structures, a simultaneous first-price sealed-bid auction may suffice. With more complex value structures, a dynamic auction with package bids likely is needed to promote efficiency and revenue objectives. Bidding on production shares, rather than bonuses, typically increases government take by reducing oil or mining company risk.

“Innovation and Market Design.” In Josh Lerner and Scott Stern (eds.), Innovation Policy and the Economy, Volume 9, National Bureau of Economic Research, 113-137, Chicago: University of Chicago Press, 2009.

Market design plays an essential role in promoting innovation. I examine emission allowance auctions, airport slot auctions, spectrum auctions, and electricity markets, and demonstrate how the market design can encourage innovation. Improved pricing information is one source of innovation. Enhancing competition is another driver of innovation seen in all of the applications. Market design fosters innovation in other ways as well by addressing other potential market failures.

“Market Design: Auctions and Matching.” In John Siegfried (ed.), Better Living Through Economics, Harvard University Press, 223-225, 2010.

“An Overview of Combinatorial Auctions” (with Yoav Shoham and Richard Steinberg), ACM SIGecom Exchanges, 7, 3-14, 2007.

An auction is combinatorial when bidders can place bids on combinations of items, called “packages,” rather than just individual items. Computer scientists are interested in combinatorial auctions because they are concerned with the expressiveness of bidding languages, as well as the algorithmic aspects of the underlying combinatorial problem. The combinatorial problem has attracted attention from operations researchers, especially those working in combinatorial optimization and mathematical programming, who are fascinated by the idea of applying these tools to auctions. Auctions have been studied extensively by economists, of course. Thus, the newly emerging field of combinatorial auctions lies at the intersection of computer science, operations research, and economics. In this article, we present a brief introduction to combinatorial auctions, based on our book, Combinatorial Auctions (MIT Press, 2006), in which we look at combinatorial auctions from all three perspectives.

“Market-Based Alternatives for Managing Congestion at New York’s LaGuardia Airport,” (with Michael O. Ball, Lawrence M. Ausubel, Frank Berardino, George Donohue, Mark Hansen, and Karla Hoffman), in Optimal Use of Scarce Airport Capacity, Proceedings of AirNeth Annual Conference, The Hague, April 2007.

We summarize the results of a project that was motivated by the expiration of the “High Density Rule,” which defined the slot controls employed at New York’s LaGuardia Airport for more than 30 years. The scope of the project included the analysis of several administrative measures, congestion pricing options and slot auctions. The research output includes a congestion pricing procedure and also the specification of a slot auction mechanism. The research results are based in part on two strategic simulations. These were multi-day events that included the participation of airport operators, most notably the Port Authority of New York and New Jersey, FAA and DOT executives, airline representatives and other members of the air transportation community. The first simulation placed participants in a stressful, high congestion future scenario and then allowed participants to react and problem solve under various administrative measures and congestion pricing options. The second simulation was a mock slot auction in which participants bid on LGA arrival and departure slots for fictitious airlines.

Combinatorial Auctions, (with Yoav Shoham and Richard Steinberg) MIT Press, 2006.

A comprehensive book on combinatorial auctions―auctions in which bidders can bid on packages of items. The book consists of original material intended for researchers, students, and practitioners of auction design. It includes a foreword by Vernon Smith, an introduction to combinatorial auctions, and twenty-three cross-referenced chapters in five parts. Part I covers mechanisms, such as the Vickrey auction and the ascending proxy auction. Part II is on bidding and efficiency issues. Part III examines computational issues and algorithmic considerations, especially the winner determination problem―how to identify the (tentative) winning set of bids that maximizes revenue. Part IV discusses implementation and methods of testing the performance of combinatorial auctions, including simulation and experiment. Part V considers four important applications: airport runway access, trucking, bus routes, and industrial procurement. The chapters develop and apply a unified language, integrating ideas from economics, operations research, and computer science. A glossary defines the central terms. The contributors are Lawrence Ausubel, Michael Ball, Martin Bichler, Sushil Bikhchandani, Craig Boutilier, Estelle Cantillon, Chris Caplice, Peter Cramton, Andrew Davenport, George Donohue, Karla Hoffman, Gail Hohner, Jayant Kalagnanam, Ailsa Land, Daniel Lehmann, Kevin Leyton-Brown, Dinesh Menon, Paul Milgrom, Rudolf Müller, Noam Nisan, Eugene Nudelman, Joseph Ostroy, David Parkes, Aleksandar Pekec, Martin Pesendorfer, Susan Powell, Amir Ronen, Michael Rothkopf, Tuomas Sandholm, Ilya Segal, Yossi Sheffi, Yoav Shoham, Richard Steinberg, Susara van den Heever, Thomas Wilson, and Makoto Yokoo.

“Introduction to Combinatorial Auctions,” (with Yoav Shoham and Richard Steinberg) in Peter Cramton, Yoav Shoham, and Richard Steinberg (eds.), Combinatorial Auctions, 1-13, MIT Press, 2006.

Combinatorial auctions are those auctions in which bidders can place bids on combinations of items, called “packages,” rather than just individual items. The study of combinatorial auctions is inherently interdisciplinary. Combinatorial auctions are in the first place auctions, a topic extensively studied by economists. Package bidding brings in operations research, especially techniques from combinatorial optimization and mathematical programming. Similarly, computer science is concerned with expressiveness of various bidding languages, and algorithmic aspects of the combinatorial problem. The study of combinatorial auctions thus lies at the intersection of economics, operations research, and computer science. In this book, we look at combinatorial auctions from all three perspectives. Indeed, our contribution is to do so in an integrated and comprehensive way. The first challenge in interdisciplinary research is getting the different disciplines to speak the same language. We have made an effort to use terms consistently throughout the book, with the most common terms defined in the glossary.

“The Clock-Proxy Auction: A Practical Combinatorial Auction Design,” (with Lawrence M. Ausubel and Paul Milgrom) in Peter Cramton, Yoav Shoham, and Richard Steinberg (eds.), Combinatorial Auctions, Chapter 5, 115-138, MIT Press, 2006. [Presentation]

We propose the clock-proxy auction as a practical means for auctioning many related items. A clock auction phase is followed by a last-and-final proxy round. The approach combines the simple and transparent price discovery of the clock auction with the efficiency of the proxy auction. Linear pricing is maintained as long as possible, but then is abandoned in the proxy round to improve efficiency and enhance seller revenues. The approach has many advantages over the simultaneous ascending auction. In particular, the clock-proxy auction has no exposure problem, eliminates incentives for demand reduction, and prevents most collusive bidding strategies.

“Dynamic Auctions in Procurement,” (with Lawrence M. Ausubel) in Nicola Dimitri, Gustavo Piga, and Giancarlo Spagnolo (eds.) Handbook of Procurement, Cambridge, England: Cambridge University Press, 2006.

We study the theory and practical implementation of dynamic procurement auctions. We consider the procurement of many related items. With many related items, price discovery is important not only to reduce the winner’s curse, but more importantly, to simplify the bidder’s decision problem and to facilitate the revelation of preferences in the bids. Three auction formats are considered: simultaneous descending auctions are preferred if the items are not divisible, simultaneous clock auctions are desirable for procuring many divisible goods, and the clock-proxy auction is best if complementarities among items are strong and varied across the suppliers. We examine the properties of these auctions and discuss important practical considerations in applying them.

“How Best to Auction Oil Rights,” in Macartan Humphreys, Jeffrey D. Sachs, Joseph E. Stiglitz (eds.), Escaping the Resource Curse, Chapter 5, 114-151, New York: Columbia University Press, 2007.

I study the design of oil rights auctions. A good auction design promotes both an efficient assignment of rights and competitive revenues for the seller. The structure of bidder preferences and the degree of competition are key factors in determining the best design. With weak competition and additive values, a simultaneous first-price sealed-bid auction may suffice. With more complex value structures, a dynamic auction with package bids, such as the clock-proxy auction, likely is needed to promote the efficiency and revenue objectives. Bidding on production shares, rather than bonuses, typically increases government take by reducing oil company risk.

“Auctioning Many Divisible Goods,” (with Lawrence M. Ausubel) Journal of the European Economic Association, 2, 480-493, April-May 2004.

We study the theory and practical implementation of auctioning many divisible goods. With multiple related goods, price discovery is important not only to reduce the winner’s curse, but more importantly, to simplify the bidder’s decision problem and to facilitate the revelation of preferences in the bids. Simultaneous clock auctions are especially desirable formats for auctioning many divisible goods. We examine the properties of these auctions and discuss important practical considerations in applying them.

“Vickrey Auctions with Reserve Pricing,” (with Lawrence M. Ausubel) Economic Theory, 23, 493-505, April 2004. Reprinted in Charalambos Aliprantis, et al. (eds.), Assets, Beliefs, and Equilibria in Economic Dynamics, Berlin: Springer-Verlag, 355-368, 2003.

We generalize the Vickrey auction to allow for reserve pricing in a multi-unit auction with interdependent values. In the Vickrey auction with reserve pricing, the seller determines the quantity to be made available as a function of the bidders’ reports of private information, and then efficiently allocates this quantity among the bidders. Truthful bidding is a dominant strategy with private values and an ex post equilibrium with interdependent values. If the auction is followed by resale, then truthful bidding remains an equilibrium in the auction-plus-resale game. In settings with perfect resale, the Vickrey auction with reserve pricing maximizes seller revenues.

“Demand Reduction and Inefficiency in Multi-Unit Auctions,” (with Lawrence M. Ausubel) Working Paper, University of Maryland, July 2002. [Presentation]

Auctions typically involve the sale of many related goods. Treasury, spectrum and electricity auctions are examples. In auctions where bidders pay the market-clearing price for items won, large bidders have an incentive to reduce demand in order to pay less for their winnings. This incentive creates an inefficiency in multiple-item auctions. Large bidders reduce demand for additional items and so sometimes lose to smaller bidders with lower values. We demonstrate this inefficiency in an auction model which allows interdependent values. We also establish that the ranking of the uniform-price and pay-as-bid auctions is ambiguous in both revenue and efficiency terms. Bidding behavior in spectrum auctions, electricity auctions, and experiments highlights the empirical importance of demand reduction.

“The Optimality of Being Efficient,” (with Lawrence M. Ausubel) Working Paper, University of Maryland, March 2001. [Presentation]

In an optimal auction, a revenue-optimizing seller often awards goods inefficiently, either by placing them in the wrong hands or by withholding goods from the market. This conclusion rests on two assumptions: (1) the seller can prevent resale among bidders after the auction; and (2) the seller can commit to not sell the withheld goods after the auction. We examine how the optimal auction problem changes when these assumptions are relaxed. In sharp contrast to the no resale assumption, we assume perfect resale: all gains from trade are exhausted in resale. In a multiple object model with independent signals, we characterize optimal auctions with resale. We prove generally that with perfect resale, the seller’s incentive to misassign goods is destroyed. Moreover, with discrete types, any misassignment of goods strictly lowers the seller’s revenue from the optimum. In auction markets followed by perfect resale, it is optimal to assign goods to those with the highest values.

Maryland Auction Conference, May 29-31, 1998.

An important economic development of the 1990s has been the restructuring of infrastructure industries. Throughout the world, markets are replacing monopoly, and private firms are increasingly providing goods and services that once were provided by government. Auctions are playing a major role in this restructuring. Auctions provide an efficient and transparent way for governments to allocate scarce resources, for monopolies to divest their assets, and for services to be traded. Applications are seen in every infrastructure industry: telecommunications (e.g., the FCC spectrum auctions), electric power, natural gas, water, air, and transportation. Treasury auctions are a related application.

In the early 1990s, economists realized that existing auction theory was inadequate for these applications. Although auction theory for the sale of a single item is well developed, each of these applications involves the sale of multiple items, often with value interdependencies among items. In response, there has been a burst of research activity on auctions for multiple items. This work is theoretical, experimental, and empirical.

This conference brings together about forty-five experts in the auction field to present and discuss their research on auctions. The conference mixes theorists, experimentalists, and empiricists. The common core is auctions and a desire to apply auction ideas to these important real-world applications.

“Ascending Auctions,” European Economic Review, 42:3-5, 745-756, May 1998. [Presentation]

A key question of auction design is whether to use an ascending-bid or a sealed-bid format. The critical distinction between formats is that an ascending auction provides the bidders with information through the process of bidding. This information is a two-edged sword. It may stimulate competition by creating a reliable process of price discovery, by reducing the winner’s curse, and by allowing efficient aggregations of items. Alternatively, the information may be used by bidders to establish and enforce collusive outcomes. Ex ante asymmetries and weak competition favor a sealed-bid design. In other cases, an ascending auction is likely to perform better in efficiency and revenue terms. Moreover, information in an ascending auction can be tailored to limit collusion.

Dissolving a Partnership Efficiently,” (with Robert Gibbons and Paul Klemperer) Econometrica, 55, 615–632, 1987. Reprinted in Paul Klemperer (ed.), The Economic Theory of Auctions, Volume 2, Cheltenham, UK: Edward Elgar, 2000.

Several partners jointly own an asset that may be traded among them. Each partner has a valuation for the asset; the valuations are known privately and drawn independently from a common probability distribution. We characterize the set of all incentive-compatible and interim-individually-rational trading mechanisms, and give a simple necessary and sufficient condition for such mechanisms to dissolve the partnership ex post efficiently. A bidding game is constructed that achieves such dissolution whenever it is possible. Despite incomplete information about the valuation of the asset, a partnership can be dissolved ex post efficiently provided no single partner owns too large a share; this contrasts with Myerson and Satterthwaite’s result that ex post efficiency cannot be achieved when the asset is owned by a single party.