Wednesday, February 23, 2011

Class #8 Take Aways

An Allocation Problem

In class #8, we discussed market design--what is the right way to allocate spectrum licenses? One way of allocating the licenses is to use a Vickrey auction.. This auction has the "pay your harm" property. You pay an amount equal to the harm you cause to the surplus of other bidders. With one unit for sale, harm is done to the second highest bidder in the amount of her bid, so the high bidder pays second highest bid.
This type of design has the nice property that it is a dominant strategy to reveal truthfully. (It also has some not so nice properties like complexity and lack of equity).

We compared this to the design actually used, the simultaneous ascending auction. This design is simpler and fairer, but leaves bidders to grapple with the exposure problem---when should you stop bidding on items in the presence of the synergy. The aspect of the design where none of the items close until all of them close is an attempt to deal with exposure.

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