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Auctions Made More Efficient

Posted on: Wednesday, 30 July 2003, 06:00 CDT

New kind of auction balances supply, demand and complex bidding strategies.

Nature -- A new way of conducting auctions could make them very efficient at matching buyers to goods, and enable buyers to use more complex bidding strategies.

Called the combinatorial auction, the method allocated goods to buyers with 99% accuracy in 25 different small-scale trials, report developers David Porter of George Mason University in Fairfax, Virginia.

The ideal auction suits both buyer and seller - it assigns items the market price that finds the classic economic balance between supply and demand.

But there are several ways in which standard auctions can become inefficient. For instance, bidders may submit bids that hike the price abruptly to forestall competition. This can mean that an item sells for more than it should.

The risk of inefficiency and distortion is even greater when an auction ventures beyond the conventional format of serial bidding for individual items. Bidders often want to place more complex, compound bids, such as: "I'll pay $10 for item A or $15 for B, but I don't want them both," or "I want to spread $50 between items A, B and C".

If such bids are allowed, the auctioneer has the difficult job of finding the best solution for all parties. Indeed, if the auction is very large it can be impossible to find this best solution in a reasonable amount of time. What's more, a combinatorial approach can confuse bidders into making foolish decisions.

Porter and colleagues' design eliminates many of these problems. It is, they say, efficient, transparent to bidders, and computationally easy to implement. They use a kind of clock to control the bidding. In each successive round, asking prices on every item tick upwards in specified steps. New bids can then be placed at that price, but not more.

While there are still two or more bidders in the race for any item, the clock price rises. When all bidders bar one withdraw, that item's price sticks, but the rest of the bidding continues. At any point, previous winning bids can be withdrawn, reactivating the respective item.

In this system it is relatively easy for the auctioneer to take combinatorial bids. Bidders know nothing more than the current prices - not who else is bidding, and on what - which suppresses crafty strategies.

Power agents dominate eBay

Meanwhile, researchers in Korea and the United States have found that online electronic auctions are less fair than conventional ones2. The capacity for bidders to place a huge number of simultaneous bids distorts the statistics of sales on eBay, relative to those in a typical auction house, they say. As a result, just a few agents dominate the online marketplace.

These 'power agents' are responsible for a significant amount of the total bidding, argue Albert-László Barabási of the University of Notre Dame, Indiana, and colleagues. They are also much more likely to win an auction than someone who enters the market just looking for a single, specific item. What's more, they end up paying less than others for similar items. "The more auctions an agent participates in, the larger is his chance to pay less for [a given] item," says the team.

One way to control online auctions might be to introduce transaction costs for submitting bids - although this would undermine a large part of their attraction.

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References

Porter, D., Rassenti, S., Roopnarine, A. & Smith, V. Combinatorial auction design. Proceedings of the National Academy of Sciences USA, published online, doi:10.1073/pnas.1633736100 (2003). |Article|

Yang, I., Jeong, H., Kahng, B. & Barabási, A.-L. Emerging behavior in electronic bidding. Physical Review E, 68, 016102, (2003). |Article|

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