Fundamentals of Supply Chain Theory XIII: AuctionsTextbook
When is the auctioneer's revenue acceptable?
The Vickrey-Clarke-Groves auction is the textbook mechanism for selling several objects at once: bidders report valuations for bundles, the auctioneer computes the welfare-maximizing allocation, and each winner pays the externality it imposes on the others. Truthful bidding is a dominant strategy and the outcome is efficient. Yet Ausubel and Milgrom (2006) catalogued its practical defects: revenue can be zero when the objects are valuable, revenue can fall when bidders or bids are added, losing bidders can profit by colluding, and a bidder can profit from false identities. Chapter 15 of Snyder and Shen's Fundamentals of Supply Chain Theory (2019) reproduces those examples and then gives the cooperative-game answer to when they cannot occur: the VCG payoff vector should lie in the core, the set of outcomes no coalition of auctioneer and bidders can improve upon, and it does so for every set of participants exactly when the coalitional value function is bidder-submodular. This mission formalizes that characterization, Theorem 15.3, together with the lemma and theorem leading to it.
Setting
Players are the auctioneer and bidders . A coalitional value function
assigns to each coalition the value it can create by trading among themselves: if the
auctioneer, who owns the objects, is not in , and otherwise the optimal value of the
auctioneer's allocation problem among the bidders of , each bidder receiving at most one
bundle and bundles disjoint (capValue). Two properties of are all the theory uses:
coalitions without the auctioneer are worthless, and adding players never lowers the value
(IsCoalitionalValue).
A payoff vector gives each player a payoff. It lies in the core of the game on a
coalition (InCore V S π) if the payoffs of sum to and no sub-coalition
is paid less than . The VCG payoff vector (vcgPayoff)
pays each bidder its marginal contribution , which is its valuation
minus its VCG payment, and the auctioneer the remainder. A core vector is bidder dominant
(BidderDominant) if every bidder weakly prefers it to every other core vector. is
bidder-submodular (BidderSubmodular) if each bidder's marginal contribution weakly
decreases as the coalition grows.
Formalization targets
Goal: Theorem 15.3
For a coalitional value function , the following are equivalent: (i) is
bidder-submodular; (ii) for every coalition the core equals
;
(iii) for every coalition , lies in the core of . This is
vcg_core_characterization.
Supporting targets
That the combinatorial auction's is a coalitional value function; Lemma 15.1, the core is nonempty and each bidder's VCG payoff is the largest it receives at any core point; Theorem 15.2, the VCG vector is the bidder-dominant core point when it is in the core, and otherwise no bidder-dominant point exists and the auctioneer's VCG payoff is below every core payoff.
The English auction of Sect. 15.2, presented as a primal-dual interpretation of a linear program, and the combinatorial allocation problem of Sect. 15.3 carry no numbered results and are not targets.
Significance
Theorem 15.3 is the criterion an auction designer can check before running a VCG auction: when the bidders' valuations make bidder-submodular (for instance when objects are substitutes), the VCG outcome is a competitive outcome, its revenue meets the core benchmark, and none of the defects of Sect. 15.4.2 can arise; when they do not, Theorem 15.2 says the auctioneer's revenue is strictly below every competitive outcome. The result underlies the ascending package auctions proposed as VCG alternatives and the procurement auctions used in supply chains, such as the combinatorial reverse auctions of the chapter's case study.
None of these results has a machine-checked proof. The book proves all three. The formal treatment of the core and of marginal-contribution vectors is reusable for the cooperative-game models of cost allocation in supply chains.
Difficulty
The theorems are combinatorial statements about a function on finite sets, and the difficulty is entirely in the bookkeeping of coalitions. Lemma 15.1 needs the explicit core vector of its proof to be verified against every sub-coalition, which splits into cases on whether the sub-coalition contains the auctioneer and the distinguished bidder. The implication (i) (ii) telescopes marginal contributions along a chain of coalitions between a sub-coalition and , and the chain has to be built and its sum computed. The implication (iii) (i) is the delicate one: a failure of submodularity is a pair of nested coalitions, and the proof needs to extract from it a single-element step at which a bidder's marginal contribution increases, then show the two-bidder sub-coalition blocks the VCG vector. The obvious idea, that submodularity can be checked only on single-element extensions, is correct but must itself be proved.
Formalization scope
Coalitions are finite sets of Fin (n+1) and payoff vectors are functions on all players; the
core and constrain only the players of , so vectors differing outside are
interchangeable. The core's budget equation sums over all players of the coalition, including
the auctioneer, which is what the book's proofs use although its displayed definition sums over
the bidders. The theorems take as any function with the two properties, and the auction's
is shown to have them; the VCG vector is defined by the formulas (15.23) and (15.24) rather
than through the payment rule, whose equivalence is the book's derivation. Bidder-submodularity
is stated for rather than proper inclusion, which changes nothing.
The definition module is shared by all five items. The single-item English auction as a primal-dual algorithm and the condition on individual preferences (substitutes) that implies bidder-submodularity are natural extensions on the same definitions.
Selected references
- L. V. Snyder and Z.-J. M. Shen, Fundamentals of Supply Chain Theory, 2nd ed., Wiley, 2019, Chapter 15. https://doi.org/10.1002/9781119584445
- L. M. Ausubel and P. Milgrom, The lovely but lonely Vickrey auction, in Combinatorial Auctions, MIT Press, 2006. https://doi.org/10.7551/mitpress/9780262033428.003.0002
- S. de Vries and R. V. Vohra, Combinatorial auctions: a survey, INFORMS Journal on Computing 15(3), 2003. https://doi.org/10.1287/ijoc.15.3.284.16077
- W. Vickrey, Counterspeculation, auctions, and competitive sealed tenders, Journal of Finance 16(1), 1961. https://doi.org/10.1111/j.1540-6261.1961.tb02789.x