Simplified mechanisms with an application to sponsored-search auctions
A mechanism can be simplified by restricting its message space. If the restricted message spaces satisfy a certain "outcome closure property," then the simplification is "tight": for every [epsilon][greater-or-equal, slanted]0, any [epsilon]-Nash equilibrium of the simplified mechanism is also an [epsilon]-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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