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Simplified mechanisms with an application to sponsored-search auctions

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  • Milgrom, Paul

Abstract

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.

Suggested Citation

  • Milgrom, Paul, 2010. "Simplified mechanisms with an application to sponsored-search auctions," Games and Economic Behavior, Elsevier, vol. 70(1), pages 62-70, September.
  • Handle: RePEc:eee:gamebe:v:70:y:2010:i:1:p:62-70
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    References listed on IDEAS

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    1. repec:hrv:faseco:32227268 is not listed on IDEAS
    2. repec:oup:oxford:v:33:y:2017:i:4:p:541-571. is not listed on IDEAS
    3. Scott Duke Kominers & Alexander Teytelboym & Vincent P Crawford, 2017. "An invitation to market design," Oxford Review of Economic Policy, Oxford University Press, vol. 33(4), pages 541-571.
    4. White, Alexander, 2013. "Search engines: Left side quality versus right side profits," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 690-701.
    5. Liran Einav & Chiara Farronato & Jonathan Levin, "undated". "Peer-to-Peer Markets," Discussion Papers 15-029, Stanford Institute for Economic Policy Research.
    6. Matías Núñez & Jean Laslier, 2014. "Preference intensity representation: strategic overstating in large elections," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(2), pages 313-340, February.
    7. Perez-Richet, Eduardo, 2011. "A note on the tight simplification of mechanisms," Economics Letters, Elsevier, vol. 110(1), pages 15-17, January.
    8. Gomes, Renato & Sweeney, Kane, 2014. "Bayes–Nash equilibria of the generalized second-price auction," Games and Economic Behavior, Elsevier, vol. 86(C), pages 421-437.
    9. Martin, Simon & Schlag, Karl, 2017. "Finite Horizon Holdup and How to Cross the River," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168136, Verein für Socialpolitik / German Economic Association.
    10. Ko, Chiu Yu & Konishi, Hideo, 2012. "Profit-maximizing matchmaker," Games and Economic Behavior, Elsevier, vol. 75(1), pages 217-232.
    11. Bichler, Martin & Goeree, Jacob K., 2017. "Frontiers in spectrum auction design," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 372-391.
    12. Liran Einav & Chiara Farronato & Jonathan Levin, 2015. "Peer-to-Peer Markets," NBER Working Papers 21496, National Bureau of Economic Research, Inc.
    13. Kos, Nenad, 2012. "Communication and efficiency in auctions," Games and Economic Behavior, Elsevier, vol. 75(1), pages 233-249.
    14. Blumrosen, Liad & Feldman, Michal, 2013. "Mechanism design with a restricted action space," Games and Economic Behavior, Elsevier, vol. 82(C), pages 424-443.

    More about this item

    Keywords

    Sponsored search Generalized second-price auctions Mechanism design;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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