Fair Payments for Efficient Allocations in Public Sector Combinatorial Auctions

  • Authors:

  • Robert W. Day;S. Raghavan

  • Affiliations:

  • Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269;Decision and Information Technologies, The Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742

  • Venue:
  • Management Science
  • Year:
  • 2007

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Abstract

Motivated by the increasing use of auctions by government agencies, we consider the problem of fairly pricing public goods in a combinatorial auction. A well-known problem with the incentive-compatible Vickrey-Clarke-Groves (VCG) auction mechanism is that the resulting prices may not be in the core. Loosely speaking, this means the payments of the winners could be so low, that there are bidders who would have been willing to pay more than the payments of the winning bidders. Clearly, this “unfair” outcome is unacceptable for a public sector auction. Recent advances in auction theory suggest that combinatorial auctions resulting in efficient outcomes and bidder-Pareto-optimal core payments offer a viable practical alternative to address this problem. This paper confronts two critical issues facing the bidder-Pareto-optimal core payment. First, motivated to minimize a bidder's ability to benefit through strategic manipulation (through collusive agreement or unilateral action), we demonstrate the strength of a mechanism that minimizes total payments among all such auction outcomes, narrowing the previously broad solution concept. Second, we address the computational difficulties of achieving these outcomes with a constraint-generation approach, promising to broaden the range of applications for which bidder-Pareto-optimal core pricing achieves a comfortably rapid solution.