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Computer Science Tackles 30-Year-Old Economics Problem

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In economists' jargon, an "auction" is any market that involves a single seller and a group of buyers. In some auctions, the seller has information about the populations from which the buyers are drawn as at a movie theater, which can ask its customers

Credit: MIT

Massachusetts Institute of Technology (MIT) researchers have developed an algorithm for finding an almost perfect approximation of the optimal design of a multi-item auction.

The difficulty in finding the optimal multi-item auction suggests that it has such a wide range that there is no simple description that provides the optimal outcome, says MIT professor Constantinos Daskalakis.

To maximize revenue, the auctioneer might have to agree to sell an item at some fraction of the highest bid, a fraction that could depend on several factors, including the difference between the top two bids, the final price of the previous item on the docket, and the populations from which the bidders are drawn. The researchers demonstrated that the optimal auction can be described as a probabilistic combination of many simple auctions, known as Vickrey-Clarke-Groves (VCG) auctions.

"The crucial thing is understanding what deterministic algorithms are in this decomposition," Daskalakis says. The researchers studied a specific type of VCG auction, in which the bids are modified according to the populations from which the bidders are drawn. They found that awarding an item to the lower bidder, as often happens with modified bids, can increase the auctioneer's revenue.

From MIT News 
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