Flexibly priced options: A new mechanism for sequential auctions with complementary goods

Valentin Robu, Ioannis A. Vetsikas, Enrico H. Gerding, Nicholas R. Jennings

Research output: Chapter in Book/Conference proceedings/Edited volumeConference contributionScientificpeer-review

Abstract

In this paper we present a novel option pricing mechanism for reducing the exposure problem encountered by bidders with complementary valuations when participating in sequential, second-price auction markets. Existing option pricing models have two main drawbacks: they either apply a fixed exercise price, which may deter bidders with low valuations, thereby decreasing allocative efficiency, or options are offered for free, in which case bidders are less likely to exercise them, thereby reducing seller revenues. Our novel mechanism with flexibly priced options addresses these problems by calculating the exercise price as well as the option price based on the bids in an auction. For this novel setting we derive the optimal strategies for a bidding agent with complementary preferences. Furthermore, to compare our approach to existing ones, we derive, for the first time, the bidding strategies for a fixed price mechanism, in which exercise prices for options are fixed by the seller. Finally, we use these strategies to empirically evaluate the proposed option mechanism and compare it to existing ones, both in terms of the seller revenue and the social welfare. We show that our new mechanism achieves higher market efficiency, while still ensuring higher revenues for the seller than direct sale auctions (without options).

Original languageEnglish
Title of host publicationAgent-Mediated Electronic Commerce - Designing Trading Strategies and Mechanisms for Electronic Markets, TADA 2010, Revised Selected Papers
PublisherSpringer
Pages62-75
Number of pages14
ISBN (Print)9783642341991
DOIs
Publication statusPublished - 1 Jan 2012
Externally publishedYes
EventACM EC Workshop on Trading Agent Design and Analysis, TADA 2010, Co-located with the EC 2010 Conference - Cambridge, MA, United States
Duration: 7 Jun 20107 Jun 2010

Publication series

NameLecture Notes in Business Information Processing
Volume118 LNBIP
ISSN (Print)1865-1348

Conference

ConferenceACM EC Workshop on Trading Agent Design and Analysis, TADA 2010, Co-located with the EC 2010 Conference
CountryUnited States
CityCambridge, MA
Period7/06/107/06/10

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