The research objective of this project is to create new knowledge, methods and analytical tools for very-high-stakes auctions, in which millions or billions of dollars may change hands. Two examples of such auctions are the FCC’s incentive auction, in which television broadcast rights worth billions of dollars will be reassigned among broadcasters, and Internet advertising auctions, which are the main revenue source for many modern Internet-based companies. In the first of these applications, there are hundreds of thousands of radio-interference constraints that limit the combinations of rights that may be granted to broadcasters. These constraints make this the most computationally challenging resource allocation problem ever managed using an auction. In the second application, the hard challenge is one of adverse selection, which arises when different bidders have access to very different information. For example, in Internet advertising, advertisers who benefit directly from clicks on their links are much better informed than brand advertisers who benefit by increasing consumer awareness for purchase decisions in brick-and-mortar stores. In this project, we will present and analyze new auction mechanisms to overcome the challenges of computation and adverse selection, and new game theoretic methods to analyze the likely outcome of alternative auction designs.
The first three tasks to be undertaken in this project are these: (1) to develop and prove theorems about the FCC incentive auction mechanism, which involves solving an NP-complete resource allocation problem, and to characterize how the computational challenges affect the efficiency of the allocation, as well as the incentives, cost, and simplicity of the auction mechanism, (2) to characterize a new, adverse-selection free auction mechanism for Internet advertising auctions and evaluate its performance in a variety of environments, and (3) to develop a new game-theoretic equilibrium refinement that is both well-founded in fundamental principles and also powerful for eliminating implausible Nash equilibria of a class of auction games.