This book provides a comprehensive introduction to modern auction theory and its important new applications. It is written by a leading economic theorist whose suggestions guided the creation of the ...new spectrum auction designs. Aimed at graduate students and professionals in economics, the book gives the most up-to-date treatments of both traditional theories of 'optimal auctions' and newer theories of multi-unit auctions and package auctions, and shows by example how these theories are used. The analysis explores the limitations of prominent older designs, such as the Vickrey auction design, and evaluates the practical responses to those limitations. It explores the tension between the traditional theory of auctions with a fixed set of bidders, in which the seller seeks to squeeze as much revenue as possible from the fixed set, and the theory of auctions with endogenous entry, in which bidder profits must be respected to encourage participation.
Imagine that you are considering an investment in a new public offering of a firm's shares. The firm's officers make a presentation that includes an audited financial statement, an earnings forecast ...reviewed by its prestigious investment bankers, and an impressive demonstration of its new technology. Or suppose that you are buying a new furnace to replace an old one that is not working well. The salesman displays a chart showing that the projected total life-cycle cost of one particular model, including capital costs and fuel usage over the projected lifetime of the furnace, is lower than that of some competing models you have considered. This paper reviews the theoretical arguments about how sellers disclose information in an attempt to encourage buyers, and the potential role for regulation in encouraging efficient disclosure of information. How well does a system of private reporting work? When should we expect all the relevant information to be reported? If testing and reporting by the seller are costly, will too little testing and reporting be done? Or too much? When some information is withheld, what sort of information is withheld? How do rational buyers respond to such withholding? How are prices and welfare affected? What role is there for laws and regulations to improve the functioning of markets? We address these questions by studying the theory of persuasion games—games in which one or more sellers provide verifiable information to buyers to influence the actions they take.
We study the class of multiround, multiproduct clock procurement auctions that reduce offered prices at each round. When prices stop declining, the remaining bidders become the winning sellers. For ...single-minded bidders, each such auction has five properties not shared by Vickrey auctions: each is obviously strategy-proof and group-strategy-proof, sets prices that are Nash equilibrium winning bids in the related first-price auction, preserves winner privacy about values, and can be extended to satisfy a budget constraint. In simulations of the US incentive auction, a heuristic clock auction from this class achieves quick computations, high efficiency, and low prices.
When a job-seeker and an employer meet, find a prospective joint surplus, and bargain over the wage, conditions in the outside labor market, including especially unemployment, may have limited ...influence. The job-seeker's only credible threat during bargaining is to hold out for a better deal. The employer's threat is to delay bargaining. Consequently, the outcome of the bargain depends on the relative costs of delays to the parties, rather than on the payoffs that result from exiting negotiations. Modeling bargaining in this way makes wages less responsive to unemployment. A stochastic model of the labor market with credible bargaining and reasonable parameter values yields larger employment fluctuations than does the standard Mortensen-Pissarides model. (JEL J22, J23, J31, J64)
Traditional economic theory studies idealized markets in which prices alone can guide efficient allocation, with no need for central organization. Such models build from Adam Smith's famous concept ...of an invisible hand, which guides markets and renders regulation or interference largely unnecessary. Yet for many markets, prices alone are not enough to guide feasible and efficient outcomes, and regulation alone is not enough, either. Consider air traffic control at major airports. While prices could encourage airlines to take off and land at less congested times, prices alone do just part of the job; an air traffic control system is still indispensable to avoid disastrous consequences. With just an air traffic controller, however, limited resources can be wasted or poorly used. What's needed in this and many other real-world cases is an auction system that can effectively reveal prices while still maintaining enough direct control to ensure that complex constraints are satisfied. In Discovering Prices, Paul Milgrom—the world's most frequently cited academic expert on auction design—describes how auctions can be used to discover prices and guide efficient resource allocations, even when resources are diverse, constraints are critical, and market-clearing prices may not even exist. Economists have long understood that externalities and market power both necessitate market organization. In this book, Milgrom introduces complex constraints as another reason for market design. Both lively and technical, Milgrom roots his new theories in real-world examples (including the ambitious U.S. incentive auction of radio frequencies, whose design he led) and provides economists with crucial new tools for dealing with the world's growing complex resource allocation problems.
Randomization is commonplace in everyday resource allocation. We generalize the theory of randomized assignment to accommodate multi-unit allocations and various real-world constraints, such as ...group-specific quotas ("controlled choice") in school choice and house allocation, and scheduling and curriculum constraints in course allocation. We develop new mechanisms that are ex ante efficient and fair in these environments, and that incorporate certain non-additive substitutable preferences. We also develop a "utility guarantee " technique that limits ex post unfairness in random allocations, supplementing the ex ante fairness promoted by randomization. This can be applied to multi-unit assignment problems and certain two-sided matching problems.
Market design applies economic principles to the often messy problems of real-world exchange in which goods may not be homogeneous, the identities of trading partners may matter, contracts may not be ...executed, and even the formulation of trade as balancing supply and demand may be unhelpful. This article recounts the mostly academic research advancing the analysis and design of such markets. Among the highlighted applications are ones involving financial markets, Internet advertising, electricity auctions, spectrum auctions, cryptocurrencies, and combinatorial procurements.
The standard envelope theorems apply to choice sets with convex and topological structure, providing sufficient conditions for the value function to be differentiable in a parameter and ...characterizing its derivative. This paper studies optimization with arbitrary choice sets and shows that the traditional envelope formula holds at any differentiability point of the value function. We also provide conditions for the value function to be, variously, absolutely continuous, left- and right-differentiable, or fully differentiable. These results are applied to mechanism design, convex programming, continuous optimization problems, saddle-point problems, problems with parameterized constraints, and optimal stopping problems.
We introduce the idea of conflation, in which similar but distinct products are treated as identical in order to make markets thick or reduce cherry-picking. We report some illustrative anecdotes of ...how excessive ad targeting can work out badly. We then describe some trade-offs in designing online advertising markets, and the ingredients for a theory of the optimal market organization. One approach to keeping participants safe is for an Internet publisher to offer a contract providing its advertiser with a representative cross section of impressions across a relatively broad target audience. An alternative approach to conflation is to limit too-narrow targeting of small sets of impressions. Such an approach aims to resolve the trade-off between targeting and market thickness.
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