An options-based solution to the sequential auction problem
Artificial Intelligence
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Electronic markets are based on classic market design assumptions that often do not hold. This thesis examines the conflict between theory and practice for the class of Vickrey-Clarke-Groves mechanisms (VCG) and the auctions it has inspired in electronic commerce, most notably the iterative auctions found on eBay. VCG mechanisms provide bidders with an optimal strategy to truthfully reveal their valuations to the marketplace, and in so doing VCG mechanisms enable efficient allocations of goods. VCG assumes not only that consumers are able to coordinate themselves to a single market and moment in time when conducting their transactions, but also that consumers can determine and express their valuations at no cost. However, in systems like eBay, bidders and sellers are highly uncoordinated, and the market is iterative because consumers are often assumed in practice not to have a complete sense of their valuation initially, but to incur costs in order to derive better beliefs of their value. The theory-practice conflict is investigated through analytic and empirical analyses of three facets of markets and consumers with independent, private valuations. First, an analysis of 1,956 auctions on eBay for a Dell E193FP LCD monitor reveals the extent to which bidders on eBay are successfully handling their lack of coordination, and the extent to which their inability to behave optimally is hampering the efficiency of eBay. Many bidders may be experiencing regret with efficiency hampered by as much as 7% as a result. Second, the design of a marketplace for uncoordinated consumers is given that provides consumers with an optimal bidding strategy to truthfully reveal their valuation to a bidding proxy. A simulation study demonstrates that this novel marketplace provides greater efficiency than eBay, while also increasing seller revenue. Finally, the efficiency of the Iterative Combinatorial Exchange (ICE), designed to accommodate bidders with costly value refinement, is compared to that of a sealed-bid VCG-based marketplace, where the amount of value refinement available to bidders is limited. ICE provides more efficient results, but not dramatically so as compared to the VCG-based market.