The Inefficiency of First and Second Price Auctions in Dynamic Stochastic Environments

Authors:
Dale O. Stahl
Affiliations:
Department of Economics, University of Texas, Austin, TX 78712, USA E-mail: stahl@eco.utexas.edu
Venue:
Netnomics
Year:
2002

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Abstract

First and second price auctions are optimal mechanisms for resource allocation in many situations and are used widely. However, unlike the static once-and-for-all situations for which auctions are efficient, in dynamic stochastic environments these standard auctions cannot necessarily support optimal allocations. The potential inefficiency of auctions is demonstrated by example. A computer server is modeled as a non-interruptible M/M/1 system, with heterogeneous users. The optimal allocation of jobs is derived, and it is shown that this allocation cannot be supported as either a first-price or a second-price auction equilibrium.