1. Authors: Oren Rigbi Damian Goren
An Efficient Dynamic Auction for Heterogeneous Commodities (Lawrence M.Ausubel - september 2000)
Authors:
Oren Rigbi
Damian Goren

2. The problem:
An auctioneer wishes to allocate one or more units of each of K heterogeneous commodities to n bidders.

3. The Lecture’s Contents:
Preface & Example
Presentation of the Model
Equilibrium of the dynamic auction
Relationship with the Vickrey auction
Conclusions

4. Situations abound in diverse industries in which heterogeneous commodities are auctioned….
On a typical day, the U.S Treasury sells :
Some $8 billion in three - month bills.
Some $5 billion in six – month bills.

5. Vickrey Auction(1)
The second-price auction is commonly called the Vickrey auction, named after William Vickrey.
For one commodity:
The item is awarded to highest bidder at a price equal to the second-highest bid.

6. Vickrey Auction(2)
For K homogenous Commodities: The items are awarded to the highest bidders The price of the unit is calculated by the price that would have been paid for this unit in case that the bidder that won this unit wouldn’t have participated the auction.

7. Example with 2 commodities Suppose that the supply vector is (10,8), i
Example with 2 commodities Suppose that the supply vector is (10,8), i.e.,10 commodities of A are available,and 8 commodities of B , and suppose that there are n = 3 bidders.
Price Vector
Bidder 1
Bidder 2
Bidder 3
p1 = (3,4)
(5,4)
p2 = (4,5)
(4,4)
(4,3)
p3 = (5,7)
(4,1)
p4 = (6,7)
(3,2)
p5 = (7,8)
(4,2)
(3,4)

8. For Example: Bidder 1 The vector demanded was (4,2)
A units:
p1: +1
p2: +1
p3: +1
p4: +1
Sums to 4.
B units:
p1: +1
p2: +1
p3: -1
p4: 0
Sums to 2.

9. The Model (1)
A seller wishes to allocate units of each of K heterogeneous commodities among n bidders.
N = {1,..., n}.
The seller’s available supply will be denoted by S = (S1 ,...,Sk ) .

10. The model (2) Bidder i’s consumption vector - is a subset of
Bidders are assumed to have pure private values for the commodities .
Bidder i’s value is given by the function
The price vector -

11. The model (3) Bidder i’s net utility function
Bidder i’s demand correspondence

12. Walrasian equilibrium
A price vector and a consumption vector
for every bidder s.t For
and
T is a finite time ,so that with every we associate a price vector

13. Sincere Bidding Bidder i is said to bid sincerely if for all .
the function is a measurable selection from the demand correspondence
and is the desired vector by bidder i at the time

14. Gross Substitutability
satisfies gross substitutability if for any and two price vectors such that
and for any there exists
such that for any commodity such that
Notice that for the it is not possible that the commodity that its price was not changed its demand can not be decreased

15. 2 commodities that are not substitutable
Assume that there are 5 left shoes and 5 right shoes.
The utility function is : U(R,L)=10 for the first couple
8 for the second couple etc then for p=( 4,3) the demand would be ( 2,2) but for p=(4,5) the demand would be (1,1) .

16. 2 commodities that are substitutable
Assume that there are 5 red shirts and 5 blue shirts.
The utility function is : U(R,B)=10 for the first shirt
8 for the second shirt etc then for p=( 6,4) the demand would be (0,4)
but for p=(6,8) the demand would be (3,0) .

17. Crediting & Debiting (1)
In the next few slides we will develop the payment equation for the case of 1 commodity.
Example:
Bidder 1
Bidder 2
Bidder 3
p0 = 4 2
p1 = 5 1
p2 = 6

18. Crediting & Debiting (2)
For k=1 (one commodity)
the payment of bidder i

19. Crediting & Debiting (3)
every time it becomes a foregone conclusion that bidder i will win additional units of the homogeneous good, she wins them at the current price and with sincere bidding she gets the same outcome of Vickery auction ,so sincere bidding by every bidder is an efficient equilibrium of the ascending -bid auction for homogeneous goods.

20. Crediting & Debiting (4)
Another way of defining the payment is
suppose that is monotonic, and define where is defined Implicitly by

21. Crediting & Debiting (5)
The case of debiting occurs only when is not monotonic and this can be only when we are talking about heterogeneous commodities . . .

22. K heterogeneous commodities (1)
K ascending clocks described continuous, piecewise smooth vector valued function-
such that
bidder bids according to the vector valued function from to
the K commodity case payment equation is:

23. K heterogeneous commodities (2)
Lemma 1: If the price is any piecewise smooth function from to and if each bidder ( ) bids sincerely for all and for all then the integral
is independent of the path
from to and ...

24. K heterogeneous commodities (3)
equals :

25. K heterogeneous commodities (4)
DEFINITION 1:
The set of all final prices attainable by i, denoted is the set of all prices at which the auction may terminate, given that all bidders j i bid sincerely, the specified price adjustment process, and all constraints on the strategy of bidder i.
notice that any attainable final price implies an associated allocation consisting of:
for each bidder
and for bidder

26. K heterogeneous commodities (5)
THEOREM 1. If each bidder bids sincerely and if bidder i’s bidding is constrained so as to generate piecewise smooth price paths from to then bidder i maximizes her payoff by maximizing social surplus over allocations associated with
Before theorem 1 a short explanation about Vickrey auction with reserve price.

27. K heterogeneous commodities (6)
THEOREM 1(cont) - Moreover, if a Walrasian price vector w is attainable by bidder i (i.e., if ) then bidder i maximizes her payoff by selecting the derived demand from Walrasian price vector, and there by receives her payoff from a Vickrey auction with a reserve price of p(0).
notice that in the vickery auction a players’ payoff is the difference between its utility and its payment while here its payoffs are the difference between the social surplus and the base allocation with reserve to p(0)

28. Equilibrium of the auction(1)
DEFINITION 2:
The triplet (A)–(B)–(C) will be said to be a stable price adjustment combination for competitive economies if:
(A) is a price adjustment process,
(B) is a set of assumptions on bidders’
preferences,
(C) is a condition on the initial price for
convergence (e.g., local, global or universal
stability) and price adjustment process (A) for an economy satisfying bidder assumptions (B) is guaranteed to converge to a Walrasian equilibrium along a piecewise smooth path in accord with initial condition (C).

29. Equilibrium of the auction(2)
Example -Let denote the vector of excess demands at time t and let (A) be a continuous and sign-preserving transformation so that the price adjustment process would be : for Let (B) include the assumption of gross substitutability plus additional assumptions on the economy

30. Equilibrium of the auction(3)
Example(cont) - guaranteeing that the excess demand for each commodity is a continuous function and that a positive Walrasian price vector exists. Let (C) be the condition of global convergence. Then (A)–(B)–(C) is a stable price adjustment combination .
(Arrow,Block and Hurwicz, 1959)

31. Equilibrium of the auction(4)
THEOREM 2. Suppose that the triplet (A)–(B)–(C) is a stable price adjustment combination for competitive economies. Consider the auction game where price adjustment is governed by process (A) and bidders have pure private values satisfying assumptions (B). Then, for initial prices p(0) in accord with (C),

32. Equilibrium of the auction(5)
THEOREM 2(cont) –
and if participation in the auction is mandatory:
(i) sincere bidding by every bidder is an
equilibrium of the auction game;
(ii) with sincere bidding, the price vector
converges to a Walrasian equilibrium price;
(iii) with sincere bidding, the outcome is that of a
Vickrey auction with reserve price of p(0).

33. Theorem 3
It the initial price p(0) is chosen such that the market clears without bidder i at price at p(0)
(i.e., ), if each bidder j  i bids sincerely, if bidder i’s bidding is constrained so as to generate piecewise smooth price paths from [0,T] to , and if a Walrasian price vector w is attainable by bidder i (i.e., if w  Pi), then bidder i maximizes her payoff by selecting a Walrasian price vector and thereby receives exactly her Vickrey auction payoff.

34. An n+1 steps algorithm for calculating payoffs Step 1
Run the auction procedure of naming a price p(t), allowing bidders j1 to respond with quantities xj(t) while imposing x1(t)=0, and adjusting price according to adjustment process (A) until such price p-1 is reached that the market clears (absent bidder 1).

35. ... Step n
Run the auction procedure of naming a price p(t), allowing bidders jn to respond with quantities xj(t) while imposing xn(t)=0, and adjusting price according to adjustment process (A) until such price p-n is reached that the market clears (absent bidder n).

36. Step n+1
Run the auction procedure of naming a price p(t), allowing all bidders i=1...n to respond with quantities xi(t), and adjusting price according to adjustment process (A) until such price w is reached that the market clears (with all bidders).

37. Payoffs Computation
Payment equation:
for bidder n:
for bidder i ( ):

38. Theorem 4
Suppose that the triplet (A)-(B)-(C) is a stable price adjustment combination for competitive economies. Consider the (n+1) step auction game where price adjustment is governed by process (A) and bidders have pure private values satisfying assumptions (B). Then for initial prices p(0) in accord with (C), sincere bidding by every bidder is an equilibrium of the (n+1) step auction game, the price vector converges to a Walrasian equilibrium price, and the outcome is exactly that of a Vickrey auction.

39. Replicating the outcome of Vickrey Auction
Select any p(0) that has the property that with any one bidder removed, there is still excess demand for every commodity,
i.e.,
for all i and all k.

40. Conclusions
The primary objective of the current design was really to introduce efficient auction procedures sufficiently simple and practicable that they might actually find themselves adopted into widespread use someday.
For the case of K heterogeneous commodities:
* A full Vickrey auction requires bidders to report
their utilities over the entire K-dimensional
space of quantity vectors.
* The current design only requires bidders to
evaluate their demands along a one-dimensional
path of price vectors.