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Simplified Mechanisms with an Application to Sponsored-Search Auctions

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  • Paul Milgrom

    () (Stanford University)

Abstract

A mechanism can be simplified by restricting its message space. If the restricted message space satisfies a certain “outcome closure property,” then the simplification is “tight”: for every S=0 any Nash equilibrium of the simplified mechanism is also an Nash equilibrium of the unrestricted mechanism. Prominent auction and matching mechanisms are tight simplifications of mechanisms studied in economic theory and often incorporate price-adjustment features that facilitate simplification. The generalized second price auction used for sponsored-search advertising is a tight simplification of a series of second-price auctions that eliminates the lowest revenue equilibrium outcomes and leaves intact only higher revenue equilibria.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-013.

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Date of creation: Dec 2008
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Handle: RePEc:sip:dpaper:08-013

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Keywords: sponsored search; generalized second-price auctions; mechanism design;

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References

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  1. Paul Milgrom, 2008. "Assignment Messages and Exchanges," Discussion Papers 08-014, Stanford Institute for Economic Policy Research.
  2. Benjamin Edelman & Michael Ostrovsky & Michael Schwarz, 2007. "Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords," American Economic Review, American Economic Association, vol. 97(1), pages 242-259, March.
  3. Kelso, Alexander S, Jr & Crawford, Vincent P, 1982. "Job Matching, Coalition Formation, and Gross Substitutes," Econometrica, Econometric Society, vol. 50(6), pages 1483-1504, November.
  4. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
  5. Leo K. Simon and William R. Zame., 1987. "Discontinuous Games and Endogenous Sharing Rules," Economics Working Papers 8756, University of California at Berkeley.
  6. John William Hatfield & Paul R. Milgrom, 2005. "Matching with Contracts," American Economic Review, American Economic Association, vol. 95(4), pages 913-935, September.
  7. Tjalling C. Koopmans & Martin J. Beckmann, 1955. "Assignment Problems and the Location of Economic Activities," Cowles Foundation Discussion Papers 4, Cowles Foundation for Research in Economics, Yale University.
  8. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  9. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
  10. Roberts, Donald John & Postlewaite, Andrew, 1976. "The Incentives for Price-Taking Behavior in Large Exchange Economies," Econometrica, Econometric Society, vol. 44(1), pages 115-27, January.
  11. Alvin E. Roth & Elliott Peranson, 1999. "The Redesign of the Matching Market for American Physicians: Some Engineering Aspects of Economic Design," NBER Working Papers 6963, National Bureau of Economic Research, Inc.
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Cited by:
  1. Perez-Richet, Eduardo, 2011. "A note on the tight simplification of mechanisms," Economics Letters, Elsevier, vol. 110(1), pages 15-17, January.

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