Vickrey auction

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pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, clean water, conceptual framework, constrained optimization, continuous double auction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, helicopter parent, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, winner-take-all economy

Anticipating the new economics of the mid-twentieth century, he realized that where markets are concerned, information is power. Vickrey Auction Markets for Everything Although poets and stamp dealers may have intuited the value of second-price auctions, Vickrey provided the theoretical underpinning for these hunches, allowing the theory to be enriched and applied with greater sophistication. This in turn vastly expanded their audience. The Vickrey auction held enormous appeal not just to economists, who were captivated by its theoretical properties, but also those with more commercial interests. This was in part for the kinds of sales that interested Vickrey—auctioning off government-owned oil concessions or assigning road-building contracts—but also, with the advent of the internet, it extended to just about anything.

The Problems with Vickrey Auctions Vickrey probably wouldn’t have been troubled by the fact that online shoppers don’t care much for his auction; he was, after all, far more interested in allocation decisions of larger social consequence. But his design also sees scarce application in areas like government procurement, which had been Vickrey’s primary motivation for building something better than a first-price auction in the first place. Nor has the Vickrey auction seen much action in the sale of state assets, where it matters not just how much revenue is generated but also that the asset—whether an oil concession or wireless spectrum—goes to the bidder who values it the most (because, it is presumed, he will make the most productive use of it). This lack of use of the Vickrey auction was something of a puzzle to economists who were captivated by the way that, in its elegant simplicity, the mechanism helped magically cure the bidders’ headaches over strategizing and overpaying.

Tanaka, a pitcher on the Rakutan Golden Eagle roster, was expected to announce his interest in moving to the majors in November. Sword’s experiences in pitching the Vickrey auction to the various interested parties—teams in America and Japan, along with their players’ unions—serve as a case study in the challenges in taking an idea from auction theory and putting it into practice. The frailties of human nature never made it onto Rothkropf’s list of Vickrey auctions’ thirteen fatal flaws, but they proved critical to understanding the ultimate outcome of Sword’s proposal to sell Tanaka’s contract via a second-price auction. A crucial disadvantage of a first-price sealed-bid auction—the kind used to get Matsuzaka to Boston—was that an overbidding manager would find himself pilloried in the local press and possibly unemployed. But the Vickrey auction turned this problem on its head, offering the winner an easy excuse.


pages: 523 words: 143,139

Algorithms to Live By: The Computer Science of Human Decisions by Brian Christian, Tom Griffiths

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4chan, Ada Lovelace, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, algorithmic trading, anthropic principle, asset allocation, autonomous vehicles, Berlin Wall, Bill Duvall, bitcoin, Community Supported Agriculture, complexity theory, constrained optimization, cosmological principle, cryptocurrency, Danny Hillis, delayed gratification, dematerialisation, diversification, double helix, Elon Musk, fault tolerance, Fellow of the Royal Society, Firefox, first-price auction, Flash crash, Frederick Winslow Taylor, George Akerlof, global supply chain, Google Chrome, Henri Poincaré, information retrieval, Internet Archive, Jeff Bezos, John Nash: game theory, John von Neumann, knapsack problem, Lao Tzu, linear programming, martingale, Nash equilibrium, natural language processing, NP-complete, P = NP, packet switching, prediction markets, race to the bottom, RAND corporation, RFC: Request For Comment, Robert X Cringely, sealed-bid auction, second-price auction, self-driving car, Silicon Valley, Skype, sorting algorithm, spectrum auction, Steve Jobs, stochastic process, Thomas Malthus, traveling salesman, Turing machine, urban planning, Vickrey auction, Walter Mischel, Y Combinator

In fact, there’s one auction design in particular that cuts through the burden of mental recursion like a hot knife through butter. It’s called the Vickrey auction. Named for Nobel Prize–winning economist William Vickrey, the Vickrey auction, just like the first-price auction, is a “sealed bid” auction process. That is, every participant simply writes down a single number in secret, and the highest bidder wins. However, in a Vickrey auction, the winner ends up paying not the amount of their own bid, but that of the second-place bidder. That is to say, if you bid $25 and I bid $10, you win the item at my price: you only have to pay $10. To a game theorist, a Vickrey auction has a number of attractive properties. And to an algorithmic game theorist in particular, one property especially stands out: the participants are incentivized to be honest.

., shading your bid) risks losing the auction for no good reason, since it doesn’t save you any money—because if you win, you’ll only be paying the value of the second-highest bid, regardless of how high your own was. This makes the Vickrey auction what mechanism designers call “strategy-proof,” or just “truthful.” In the Vickrey auction, honesty is literally the best policy. Even better, honesty remains the best policy regardless of whether the other bidders are honest themselves. In the prisoner’s dilemma, we saw how defection turned out to be the “dominant” strategy—the best move no matter whether your partner defected or cooperated. In a Vickrey auction, on the other hand, honesty is the dominant strategy. This is the mechanism designer’s holy grail. You do not need to strategize or recurse. Now, it seems like the Vickrey auction would cost the seller some money compared to the first-price auction, but this isn’t necessarily true.

Now, it seems like the Vickrey auction would cost the seller some money compared to the first-price auction, but this isn’t necessarily true. In a first-price auction, every bidder is shading their bid down to avoid overpaying; in the second-price Vickrey auction, there’s no need to—in a sense, the auction itself is optimally shading their bid for them. In fact, a game-theoretic principle called “revenue equivalence” establishes that over time, the average expected sale price in a first-price auction will converge to precisely the same as in a Vickrey auction. Thus the Vickrey equilibrium involves the same bidder winning the item for the same price—without any strategizing by any of the bidders whatsoever. As Tim Roughgarden tells his Stanford students, the Vickrey auction is “awesome.” For Hebrew University algorithmic game theorist Noam Nisan, this awesomeness has an air to it that’s nearly utopian. “You would like to get some kind of rules of society where it’s not worthwhile to lie, and then people won’t lie so much, right?


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

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Albert Einstein, barriers to entry, Berlin Wall, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, invention of movable type, John Nash: game theory, John von Neumann, market design, Martin Wolf, moral hazard, new economy, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

To a theorist, this doesn’t seem odd at all: after all, in a traditional auction at Sotheby’s or Christies, the price is also set by the second-highest bidder, because bidding stops when the second-highest bidder drops out. To the press and many others, this Vickrey auction looked nothing short of crazy. The problem with the Vickrey auction is not substantive but stylistic: in a traditional auction nobody ever finds out the maximum price the highest bidder would have been willing to pay, but in a Vickrey auction that fact is made public. Justifiably, New Zealanders wanted to know why a bidder who had offered NZ$100,000 (about $72,000) for a license only had to pay NZ$6 ($4+) or why one who had offered NZ$7 ($5+) million was only coughing up NZ$5,000 (around $3,600). These figures were embarrassing. The theorists knew that on average, Vickrey auctions make just as much money as other auctions because, by not demanding payment of the highest bid, they encourage all bidders to offer more.

The New Zealand government, which auctioned radio spec- trum as early as 1990 with advice from some economists who • 163 • T H E U N D E R C O V E R E C O N O M I S T seemed to have a slender grasp on reality, learned such lessons the hard way. The auctions were held without making sure that there was any interest from bidders, without minimum prices, and using a theoretical curiosity called a “Vickrey auction,” which led to considerable embarrassment. (The auction was named after its inventor, Nobel laureate William Vickrey, who made major early advances in applying game theory to auctions.) The Vickrey auction is a second-price sealed-bid auction. The “sealed bid” means that each bidder writes down a single bid and seals it in an envelope. When the envelopes are opened, the highest bidder wins. “Second-price” is the curious rule that the winner pays not his bid but that of the second-highest bidder.

The theorists knew that on average, Vickrey auctions make just as much money as other auctions because, by not demanding payment of the highest bid, they encourage all bidders to offer more. But what the theorists knew did not matter to the press and to the public: the harsh reality is that Vickrey auctions were seen as a failure of the New Zealand government. Game theory can help predict some problems, such as cheating in the US auction. Others, such as the public reaction in New • 164 • T H E M E N W H O K N E W T H E V A L U E O F N O T H I N G Zealand, simply don’t show up in the theoretical analysis. Economists who aspire to dentistry have to think carefully and learn from mistakes: new ones will continue to be discovered the hard way. Why use an auction? When the UK government started to consider using an auction to sell spectrum rights, they were taking a bold step. After initial success, the US auctions had fallen apart because the game theory used to construct them had been far too narrowly conceived.


pages: 298 words: 43,745

Understanding Sponsored Search: Core Elements of Keyword Advertising by Jim Jansen

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AltaVista, barriers to entry, Black Swan, bounce rate, business intelligence, butterfly effect, call centre, Claude Shannon: information theory, complexity theory, correlation does not imply causation, en.wikipedia.org, first-price auction, information retrieval, inventory management, life extension, linear programming, megacity, Nash equilibrium, Network effects, PageRank, place-making, price mechanism, psychological pricing, random walk, Schrödinger's Cat, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, sentiment analysis, social web, software as a service, stochastic process, telemarketer, the market place, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Vickrey auction, yield management

Now that we know how the sponsored-search auction works, let us examine the theoretical underpinning of such auctions. The theoretical basis for the sponsored-search auction is the Generalized Second Priced (GSP) auction. The Vickrey auction is the ideal form of GSP auction, so we start here with a brief discussion of the ideal form. A Vickrey auction A Vickrey auction is a type of sealed-bid auction where bidders submit bids without knowing the bid of the other people in the auction. The highest bidder wins, but the bidder pays the amount of the second-highest bid. Very similar to the Standard English auction that one might see at a livestock sale, where all bids are public and known by all, the Vickrey auction gives bidders an incentive to bid their true value. Naturally, this view of the value can be false, incorrect, or misguided. This possibility aside, however, each advertiser believes their valuation is correct.

However, if the auction is in equilibrium, there is no winner’s curse because the bidders account for this effect in their own bids and adjust accordingly. Therefore, each bid represents the true valuation of the resources by the buyer. The pure Vickrey auction deals with auctions where a single good is being sold (i.e., a second-price sealed-bid auction). When multiple identical resources are for sale, things get more complex, and one can apply the same payment principal (i.e., have all winning bidders pay the amount of the highest nonwinning bid). This is known as a uniform price auction. Unfortunately, this situation does not result in bidders bidding their true valuations in most situations, and the auction does not reach stability. Vickrey-Clarke-Groves (VCG) mechanism A generalization of the Vickrey auction that maintains the incentive to bid truthfully is known as the Vickrey-Clarke-Groves (VCG) mechanism. The idea in VCG is that The Serious Game of Bidding 195 each player in the auction pays the opportunity cost (i.e., the cost of the next-best choice available) that their presence in the auction introduces to the other players.

When a game hits equilibrium, each player in the game is implementing a strategy that is unlikely to change. In classic auction theory, the participants are interested in maximizing their own situation without considering others [9]. Auction theory research has lead to the development of several auction formats or types of auction markets. The format that we are most interested in is the Generalized Second Price auction and its poster-child auction, the Vickrey auction, as well as the generalized form, the Vickrey-Clarke-Groves auction. Potpourri: Google AdWords was the first sponsored-search platform that utilized the format now known as Generalized Second Price auction. The Serious Game of Bidding 181 The Generalized Second Price auction quickly became the standard for keyword auctions, with an amazingly broad impact on the Web and e-commerce. Although Hal Varian, the first Google chief economist, is best known as the face of Google AdWords, the credit for developing the Google AdWords system goes to Salar Kamangar, the ninth employee at Google, and Eric Veach, another early Google employee and Distinguished Engineer.


pages: 220 words: 73,451

Democratizing innovation by Eric von Hippel

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additive manufacturing, correlation coefficient, Debian, hacker house, informal economy, inventory management, iterative process, James Watt: steam engine, knowledge economy, meta analysis, meta-analysis, Network effects, placebo effect, principal–agent problem, Richard Stallman, software patent, transaction costs, Vickrey auction

That is, success was found to be significantly affected by the quality of trial-and-error learning enabled by a toolkit, by the quality of fit of the solution space offered to users’ design problems, by the user friendliness of the tools provided, and by the quality of module libraries offered with the toolkit. Schreier and Franke 162 Chapter 11 (2004) also obtained information on the importance of toolkit quality in a study of the value that users placed on consumer products (scarves, T shirts, cell phone covers) customized with a simple, manufacturer-supplied toolkit. They found user willingness to pay for custom designs, as measured by Vickrey auctions, was significantly negatively affected by the difficulty of creating custom designs with a toolkit. In contrast, willingness to pay was significantly positively affected by enjoyment experienced in using a toolkit. With respect to industry and market conditions, the toolkit-for-user innovation approach to product design is likely to be most appealing to toolkit suppliers when the heterogeneous needs of many users can be addressed by a standard solution approach encoded in a toolkit.


pages: 406 words: 88,820

Television disrupted: the transition from network to networked TV by Shelly Palmer

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barriers to entry, call centre, disintermediation, en.wikipedia.org, hypertext link, interchangeable parts, invention of movable type, James Watt: steam engine, linear programming, market design, pattern recognition, recommendation engine, Saturday Night Live, shareholder value, Skype, spectrum auction, Steve Jobs, subscription business, Telecommunications Act of 1996, Vickrey auction, yield management

On the other hand, it is possible that multiple client-side playback devices (rather than converged single hybrid computer/television/media centers) will utilize the contact network while the more traditional household technologies like television sets and flat-screen monitors continue to use the content networks. As we have said, these networks will undoubtedly coexist. Unfortunately, the contact network value chain is extremely unfriendly to the way that content providers like to monetize their content. One very probable future is the evolution of a new value chain for video content that closely mimics the Vickrey auctions made popular by search engine advertising. It can’t truly happen until the traditional media business reinvents they way television media is bought and sold. Will the content providers compete with the contact providers by creating a truly modern, computerized marketplace for media? One that resembles “best practices” electronic exchanges like the NASDAQ, as opposed to the existing media marketplace —which most closely resembles a fifteenth-century textile bazaar?