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Algorithmic Game Theory

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CombinatoricsEconomicsOperations Research+1·Captain: mikedeng1

Endogenous Risk Exposure and Systemic Instability II: Banks Take More Risk in the Least Equilibrium of a Complete Network than of a Ring NetworkResearch Paper

Motivation

Banks lend to one another, and the shape of the resulting network decides how a loss at one bank reaches the others. A long line of work, starting with Allen and Gale (2000) and continued by Acemoglu, Ozdaglar and Tahbaz-Salehi (2015), compares the ring network, where each bank is owed money by one neighbour, with the complete network, where every bank holds an equal share of every other bank's debt. That literature studies contagion after shocks hit and finds that the complete network spreads losses thinly and can absorb small shocks better.

Shu's paper (Management Science, doi:10.1287/mnsc.2022.01519) asks the ex-ante question: when banks choose how much risk to take, knowing the network they sit in, which network makes them take more? A successful bank subsidizes its failed counterparties through the clearing of interbank debt, and anticipating that subsidy pushes it toward riskier projects. Proposition 4 of the paper says that this effect is stronger in the complete network. This mission formalizes that proposition and the computation behind it.

Setting

There are N≥2N\ge2N≥2 banks. In a regular network with share matrix Θ=[θij]\Theta=[\theta_{ij}]Θ=[θij​], bank jjj owes bank iii the face value θijdˉ\theta_{ij}\bar dθij​dˉ, every bank has total interbank liability dˉ>0\bar d>0dˉ>0, and every bank also owes a senior deposit v>0v>0v>0. The two networks of Definition 3 are

ΘR: θij=1 iff j≡i−1(modN),ΘC=1N−1(1N,N−IN).\Theta^R:\ \theta_{ij}=1 \text{ iff } j\equiv i-1 \pmod N,\qquad \Theta^C=\tfrac{1}{N-1}\big(\mathbb 1_{N,N}-I_N\big).ΘR: θij​=1 iff j≡i−1(modN),ΘC=N−11​(1N,N​−IN​).

Each bank iii chooses a project ZiZ_iZi​ in a common interval [Z‾,Z‾][\underline Z,\overline Z][Z​,Z]. The project pays ZiZ_iZi​ with probability P(Zi)P(Z_i)P(Zi​) and 000 otherwise, independently across banks. Assumption 1 requires P(Z)∈(0,1)P(Z)\in(0,1)P(Z)∈(0,1), PPP decreasing, and P(Z) ZP(Z)\,ZP(Z)Z concave. The standing assumption Z‾≥v+dˉ\underline Z\ge v+\bar dZ​≥v+dˉ says a successful bank never defaults.

After the state ω∈{s,f}N\omega\in\{s,f\}^Nω∈{s,f}N is realized, interbank payments clear. A payment equilibrium is a vector ddd with

di={min⁡[∑jθijdj+ei−v, dˉ]}+,d_i=\Big\{\min\Big[\textstyle\sum_j\theta_{ij}d_j+e_i-v,\ \bar d\Big]\Big\}^+,di​={min[∑j​θij​dj​+ei​−v, dˉ]}+,

where ei=Zie_i=Z_iei​=Zi​ if bank iii succeeds and 000 if it fails. Bank iii's profit is (∑jθijdj∗+ei−v−di∗)+\big(\sum_j\theta_{ij}d^*_j+e_i-v-d^*_i\big)^+(∑j​θij​dj∗​+ei​−v−di∗​)+. A risk-taking equilibrium is a profile Z∗Z^*Z∗ in which each Zi∗Z^*_iZi∗​ maximizes bank iii's expected profit given Z−i∗Z^*_{-i}Z−i∗​. Equilibria need not be unique, and the paper selects the least one.

The key quantity is the network risk-taking distortion

Di(Z−i)=∑ω−i(dˉ−∑jθijdj∗(ωi=s))Pr⁡(ω−i),\mathcal D_i(Z_{-i})=\sum_{\omega_{-i}}\Big(\bar d-\sum_j\theta_{ij}d^*_j(\omega^{i=s})\Big)\Pr(\omega_{-i}),Di​(Z−i​)=ω−i​∑​(dˉ−j∑​θij​dj∗​(ωi=s))Pr(ω−i​),

which is bank iii's expected net interbank payment to the other banks when its own project succeeds. In a regular network, expected profit equals P(Zi)(Zi−v)−P(Zi) Di(Z−i)P(Z_i)(Z_i-v)-P(Z_i)\,\mathcal D_i(Z_{-i})P(Zi​)(Zi​−v)−P(Zi​)Di​(Z−i​), so Di\mathcal D_iDi​ acts like extra debt that the bank repays only when it succeeds. Superscripts CCC and RRR mark the complete and ring networks.

Formalization targets

Goal: Proposition 4

With ZCZ^CZC the least equilibrium of the complete network and ZRZ^RZR the least equilibrium of the ring,

ZiR≤ZiCfor every bank i.Z^R_i\le Z^C_i\qquad\text{for every bank } i.ZiR​≤ZiC​for every bank i.

Milestones

  1. Clearing in the complete network (IA p. 15): a failed bank pays (dˉ−N−1Sv)+\big(\bar d-\frac{N-1}{S}v\big)^+(dˉ−SN−1​v)+, where SSS is the number of successful banks.
  2. (I.13): with qqq the common success probability of the other banks and Pr⁡(m)=(N−1m)(1−q)mqN−1−m\Pr(m)=\binom{N-1}{m}(1-q)^mq^{N-1-m}Pr(m)=(mN−1​)(1−q)mqN−1−m,
DiC=∑m=1N−1min⁡(mvN−m,mdˉN−1)Pr⁡(m).\mathcal D^C_i=\sum_{m=1}^{N-1}\min\Big(\frac{mv}{N-m},\frac{m\bar d}{N-1}\Big)\Pr(m).DiC​=m=1∑N−1​min(N−mmv​,N−1mdˉ​)Pr(m).
  1. (I.14): in the ring, a failed bank pays (dˉ−Kiv)+(\bar d-K_iv)^+(dˉ−Ki​v)+, where KiK_iKi​ counts the consecutive failed banks upstream of iii, starting with iii itself.
  2. (I.15): the conditional distribution, given mmm failures, of what a successful bank receives in the ring.
  3. Closed form of DiR\mathcal D^R_iDiR​ (IA p. 16, also p. 14).
  4. Lemma I.A (ii): ∑l=rn(lr)(n−l)=(n+1r+1)n−rr+2\sum_{l=r}^n\binom lr(n-l)=\binom{n+1}{r+1}\frac{n-r}{r+2}∑l=rn​(rl​)(n−l)=(r+1n+1​)r+2n−r​. Part (i), the classical hockey-stick identity, is already published and proved on the platform and is included by reference.
  5. Lemma I.B: ∑iAi+≥(∑iAi−B)++B\sum_i A_i^+\ge(\sum_iA_i-B)^++B∑i​Ai+​≥(∑i​Ai​−B)++B whenever B<max⁡iAiB<\max_iA_iB<maxi​Ai​.
  6. DiR≤DiC\mathcal D^R_i\le\mathcal D^C_iDiR​≤DiC​ when all other banks choose the same project.

Significance

The result. Proposition 4 reverses the conventional reading of the complete network as the safer structure. The co-insurance that makes it resilient after a shock is the same cross-subsidy that weakens incentives before the shock. Two networks with the same face-value liabilities dˉ+v\bar d+vdˉ+v therefore induce different equilibrium risk-taking. Liabilities alone are not a sufficient statistic for risk incentives, and the network topology matters in its own right. The same comparison is the template for the paper's later results on the number of banks and on central clearing.

Formalizing it. The proposition is proved in the paper, not open, and none of it is machine-checked yet. A formal proof must establish the two clearing vectors, the counting identity behind (I.15), and the two closed forms of the distortion. The printed argument also leaves a step to be supplied: its final appeal to "the monotone selection theorem" needs the distortion comparison at every profile of the other banks. It is proved only when they all choose the same project, and it is false in general. The goal is nevertheless stated for least equilibria exactly as in the paper, and its formal proof has to bridge that gap. The milestones are true as stated.

Difficulty

The distortion of the ring is not a function of the number of failures alone. What a successful bank receives depends on the length of the run of failed banks immediately upstream of it, so the closed form needs an exact count of the binary strings with a given number of failures and a given initial run length. The comparison of the two distortions is not termwise either: the positive part sits inside a sum on the ring side and outside it on the complete side.

The obvious final step is to say that the distortion is larger in the complete network, and that a larger distortion raises the optimal risk exposure. That step does not go through as stated. The equilibrium comparison needs control of the best-response maps at every profile, while the distortion comparison holds only on the diagonal, where all other banks choose the same project. Some further structure of the two games is needed to restrict attention to that diagonal.

Formalization scope

Banks are Fin N with N≥2N\ge2N≥2, and states are Fin N → Bool with true meaning success. The paper's general model is specialized to a regular network given by (Θ,dˉ,v)(\Theta,\bar d,v)(Θ,dˉ,v), which covers both networks of Definition 3. Every expectation is a finite sum over the 2N2^N2N states, so no measure theory is involved. The payment equilibrium d∗d^*d∗ is the greatest solution of the clearing system, because the paper asserts only generic uniqueness. Every bank's project lies in [Z‾,Z‾][\underline Z,\overline Z][Z​,Z], and Z‾≥v+dˉ\underline Z\ge v+\bar dZ​≥v+dˉ is a hypothesis of every statement.

The distortion milestones (2, 5 and 8) are stated at the constant profile in which every bank chooses the same zzz, which is how the page's single P(Z−i)P(Z_{-i})P(Z−i​) reads. At m=N−1m=N-1m=N−1, where every other bank fails, the printed ring binomial has lower index −1-1−1, and the weight is fixed explicitly to 111 at l=N−1l=N-1l=N−1. Proposition 4 is stated for least equilibria and weak inequality. It adds one hypothesis the page does not state, continuity of PPP on [Z‾,Z‾][\underline Z,\overline Z][Z​,Z], so that best responses and least equilibria exist. Without it the IsLeast hypotheses could be unsatisfiable and the goal vacuous.

Trivializing encodings are ruled out: d∗d^*d∗ is an actual solution of the clearing system, not a junk supremum, and the run length KiK_iKi​ is only used in states where some bank succeeds.

A complete development needs Knaster–Tarski on the box [0,dˉ]N[0,\bar d]^N[0,dˉ]N, the clearing computations for the two networks, binomial identities, and a monotone comparative statics argument for the equilibria. Published Topkis results on supermodular games (existence of least equilibria, and monotonicity of least fixed points in a parameter) are included by reference as tools. The clearing and counting lemmas are reusable for the paper's other results on ring and complete networks. Proofs of any milestone, and of the goal, are welcome.

Not posed here: Proposition 1 (strategic complementarity in any network, a separate mission), Proposition 2 (existence), and the later comparative statics in the number of banks, central clearing and bailouts.

Selected references

  • C. Shu, Endogenous Risk Exposure and Systemic Instability, Management Science (accepted manuscript, 17 Sep 2024). https://doi.org/10.1287/mnsc.2022.01519
  • F. Allen and D. Gale, Financial Contagion, Journal of Political Economy 108(1), 2000. https://doi.org/10.1086/262109
  • D. Acemoglu, A. Ozdaglar and A. Tahbaz-Salehi, Systemic Risk and Stability in Financial Networks, American Economic Review 105(2), 2015. https://doi.org/10.1257/aer.20130456
  • L. Eisenberg and T. H. Noe, Systemic Risk in Financial Systems, Management Science 47(2), 2001. https://doi.org/10.1287/mnsc.47.2.236.9835
  • D. M. Topkis, Supermodularity and Complementarity, Princeton University Press, 1998. https://doi.org/10.1515/9781400822539
13 thms4 active usersReviewed
Operations ResearchProbability·Captain: mikedeng1

Worst-Case Equilibria II: On Two Links with Speeds s₁ ≤ s₂ ≤ φs₁ Some Nash Equilibrium Has Expected Makespan 1 + s₂/(s₁ + s₂) Times the Optimum, Reaching φ at s₂ = φs₁Research Paper

Motivation

When many independent users share a network, each routes its own traffic to minimize its own delay, and nobody optimizes the system as a whole. Koutsoupias and Papadimitriou asked how much this lack of coordination can cost: how far the social cost of a Nash equilibrium can be from the social optimum, in the worst case. Their paper Worst-case equilibria (STACS 1999; journal version 2009, doi:10.1016/j.cosrev.2009.04.003) introduced this ratio, later named the price of anarchy, and studied it on the simplest network: parallel links between one source and one destination. The ratio has since become a standard measure of the inefficiency of equilibria in routing, scheduling and auctions (see Chapters 17–20 of Nisan, Roughgarden, Tardos and Vazirani, Algorithmic Game Theory, 2007).

Most of the paper concerns links of equal capacity. Its last result, Theorem 4, turns to two links of different speeds and shows that unequal speeds make equilibria worse: the worst-case ratio rises from 3/23/23/2 for two identical links to the golden ratio φ=(1+5)/2≈1.618\varphi=(1+\sqrt5)/2\approx1.618φ=(1+5​)/2≈1.618.

Timeline. 1999: Koutsoupias and Papadimitriou define the coordination ratio; for two identical links they prove it is exactly 3/23/23/2, and for two links with speeds they give the golden-ratio lower bound of Theorem 4. 2002–2003: Mavronicolas and Spirakis, Koutsoupias, Mavronicolas and Spirakis, and Czumaj and Vöcking determine the asymptotic order of the price of anarchy for mmm identical and for mmm related links (Czumaj–Vöcking, ACM TALG 2007).

Setting

There are nnn agents and mmm parallel links. Agent iii has an amount of traffic wi>0w_i>0wi​>0, and link jjj has a speed sj>0s_j>0sj​>0. A pure profile a=(a1,…,an)a=(a_1,\dots,a_n)a=(a1​,…,an​) sends each agent's whole traffic over one link aia_iai​. The load of link jjj is Lj(a)=∑k: ak=jwkL_j(a)=\sum_{k:\,a_k=j}w_kLj​(a)=∑k:ak​=j​wk​, and an agent on link jjj experiences the delay Lj(a)/sjL_j(a)/s_jLj​(a)/sj​.

A mixed strategy of agent iii is a probability distribution (pi1,…,pim)(p_i^1,\dots,p_i^m)(pi1​,…,pim​) over the links; the agents randomize independently. The expected cost of agent iii is its expected delay. A profile ppp is a Nash equilibrium if no agent can lower its expected cost by changing its own distribution. The expected traffic on link jjj is Mj=∑ipijwiM^j=\sum_i p_i^jw_iMj=∑i​pij​wi​, and the cost to agent iii of placing its traffic on link jjj is

cij=Mj+(1−pij) wisj.(8)c_i^j=\frac{M^j+(1-p_i^j)\,w_i}{s_j}. \tag{8}cij​=sj​Mj+(1−pij​)wi​​.(8)

The social cost of ppp is the expected makespan, the expected maximum delay over the links,

cost⁡(p)=∑a(∏ipiai)max⁡jLj(a)sj,\operatorname{cost}(p)=\sum_a\Big(\prod_i p_i^{a_i}\Big)\max_j\frac{L_j(a)}{s_j},cost(p)=a∑​(i∏​piai​​)jmax​sj​Lj​(a)​,

and opt⁡=min⁡amax⁡jLj(a)/sj\operatorname{opt}=\min_a\max_j L_j(a)/s_jopt=mina​maxj​Lj​(a)/sj​ is the optimal makespan over pure assignments. The price of anarchy is the largest ratio cost⁡(p)/opt⁡\operatorname{cost}(p)/\operatorname{opt}cost(p)/opt over instances and equilibria.

Formalization targets

Goal: Theorem 4 (PDF p. 6)

For two links with speeds 0<s1≤s2≤φs10<s_1\le s_2\le\varphi s_10<s1​≤s2​≤φs1​, there is an instance with positive traffic and a Nash equilibrium ppp with opt⁡>0\operatorname{opt}>0opt>0 and

cost⁡(p)=R⋅opt⁡,R=1+s2s1+s2;\operatorname{cost}(p)=R\cdot\operatorname{opt},\qquad R=1+\frac{s_2}{s_1+s_2};cost(p)=R⋅opt,R=1+s1​+s2​s2​​;

moreover R≤φR\le\varphiR≤φ on this range, and R=φR=\varphiR=φ when s2=φs1s_2=\varphi s_1s2​=φs1​.

Milestones

  1. (8): the expected delay of a pure deviation is cij=(Mj+(1−pij)wi)/sjc_i^j=(M^j+(1-p_i^j)w_i)/s_jcij​=(Mj+(1−pij​)wi​)/sj​.
  2. Support property (§2, applied with speeds): at an equilibrium each agent puts positive probability only on links minimizing cijc_i^jcij​, and its expected cost is ci=min⁡jcijc_i=\min_jc_i^jci​=minj​cij​.
  3. For s1≤s2s_1\le s_2s1​≤s2​, the probabilities p11=s12/(s2(s1+s2))p_1^1=s_1^2/(s_2(s_1+s_2))p11​=s12​/(s2​(s1​+s2​)) and p21=1−s22/(s1(s1+s2))p_2^1=1-s_2^2/(s_1(s_1+s_2))p21​=1−s22​/(s1​(s1​+s2​)) lie in [0,1][0,1][0,1] if and only if s2≤φs1s_2\le\varphi s_1s2​≤φs1​.
  4. With w1=s2w_1=s_2w1​=s2​, w2=s1w_2=s_1w2​=s1​, this profile is a Nash equilibrium.
  5. Its social cost is (s1+2s2)/(s1+s2)(s_1+2s_2)/(s_1+s_2)(s1​+2s2​)/(s1​+s2​).
  6. The instance has opt⁡=1\operatorname{opt}=1opt=1.
  7. R≤φR\le\varphiR≤φ, with equality at s2/s1=φs_2/s_1=\varphis2​/s1​=φ.

Significance

The result. Theorem 4 shows that the price of anarchy of parallel links depends on the heterogeneity of the links, not only on their number: two identical links have price of anarchy 3/23/23/2 (Theorems 1 and 3 of the paper), while two links of different speeds already reach φ\varphiφ. The setting is that of related (uniformly related) machines, the model in which Czumaj and Vöcking later proved the asymptotic order of the price of anarchy for mmm links.

Formalizing it. The result is proved on paper; this mission produces a machine-checked proof. Beyond the theorem, it yields reusable statements about mixed equilibria of load-balancing games on the published agt_games vocabulary: the closed form (8) of a pure deviation's expected cost and the support characterization of equilibria, both stated for any number of agents and links. A search of the Prove2Me catalog (October 2026) found no formalization of any part of this result.

Difficulty

The arithmetic of the instance is elementary, so the work lies in connecting the paper's computations to the definitions. The paper's notion of equilibrium quantifies over all mixed deviations, and its expected costs are sums over all mnm^nmn pure profiles; the proof reasons instead with the per-link costs cijc_i^jcij​ of (8) and the indifference of each agent between the links it uses. Turning that into a proof requires showing that an agent's expected cost is the pip_ipi​-weighted average of the cijc_i^jcij​ (linearity over independent randomization) and that the average over 222^222 outcomes reduces to the paper's four-term formula. A naive approach that checks only pure deviations does not give the equilibrium property directly; one must pass from pure to mixed deviations. The restriction s2≤φs1s_2\le\varphi s_1s2​≤φs1​ is not cosmetic: beyond it the second agent's probability is negative.

Formalization scope

The game is defined in WorstCaseEq.Speeds.Model on top of the published agt_games definitions (AGT.IsMixedNash, AGT.expectedPayoff, AGT.profileProb). These maximize payoffs, so an agent's payoff is minus its delay. Agents and links are Fin n and Fin m, indexed from 000, so the paper's links 1, 2 and agents 1, 2 are 0, 1. A mixed profile is a real matrix p i j; being a family of probability distributions is part of the Nash condition. Makespan, social cost and opt require at least one link (NeZero m).

The paper does not print the social cost for links with speeds; the computation in the proof of Theorem 4 uses the expected maximum of load divided by speed, and that is the definition. It is not the maximum of the expected loads, a smaller quantity. The page numbers cited are PDF page indices of the journal version (dated April 29, 2009), which prints no page numbers after page 1.

"The price of anarchy is at least RRR" is formalized as the existence of an instance and an equilibrium whose social cost equals RRR times a positive optimum. A quotient cost⁡/opt⁡\operatorname{cost}/\operatorname{opt}cost/opt is avoided because it takes the junk value 000 when opt⁡=0\operatorname{opt}=0opt=0, and the requirement opt⁡>0\operatorname{opt}>0opt>0 rules out degenerate witnesses with no traffic. The ratio conditions s2/s1≤φs_2/s_1\le\varphis2​/s1​≤φ and s2/s1=φs_2/s_1=\varphis2​/s1​=φ are written s2≤φs1s_2\le\varphi s_1s2​≤φs1​ and s2=φs1s_2=\varphi s_1s2​=φs1​ (equivalent since s1>0s_1>0s1​>0), and φ\varphiφ is Mathlib's Real.goldenRatio.

Contributions welcome: proofs of any milestone. Milestones 1 and 2 are general facts about mixed equilibria of weighted load-balancing games and are reusable beyond this mission.

Selected references

  • E. Koutsoupias and C. Papadimitriou, Worst-case equilibria, STACS 1999, LNCS 1563, pp. 404–413, doi:10.1007/3-540-49116-3_38; journal version, Computer Science Review 3(2), 2009, pp. 65–69, doi:10.1016/j.cosrev.2009.04.003.
  • A. Czumaj and B. Vöcking, Tight bounds for worst-case equilibria, ACM Transactions on Algorithms 3(1), 2007, doi:10.1145/1186810.1186814.
  • N. Nisan, T. Roughgarden, É. Tardos and V. Vazirani (eds.), Algorithmic Game Theory, Cambridge University Press, 2007, Chapter 20, doi:10.1017/CBO9780511800481.
11 thms4 active usersReviewed
Operations ResearchOptimization·Captain: mikedeng1

A game-theoretic approach to computation offloading in mobile cloud computing I: The Offloading GNEP Has a SolutionResearch Paper

Motivation

Mobile devices run applications whose computational load can exceed what the device itself can serve in reasonable time and with reasonable battery drain. Computation offloading sends part of that load elsewhere: to a cloudlet, a small cluster of servers one wireless hop away, or to a distant cloud reached through the wide-area network. The cloudlet is shared, so its response time depends on how much load all users send to it, and each user's best offloading decision depends on everybody else's. Cardellini, De Nitto Personé, Di Valerio, Facchinei, Grassi, Lo Presti and Piccialli (Math. Program., 2016, DOI 10.1007/s10107-015-0881-6) model this as a non-cooperative game between users and study it with the tools of variational inequalities.

The game is a generalized Nash equilibrium problem (GNEP): not only the costs but also the feasible sets of the players depend on the other players' choices, because all users share one capacity constraint on the cloudlet. GNEPs with a shared convex constraint (jointly convex games) can be reduced to a single variational inequality, a reduction the paper takes from Facchinei, Fischer and Piccialli (Oper. Res. Lett. 2007, DOI 10.1016/j.orl.2006.03.004); Facchinei and Kanzow survey the area (Ann. Oper. Res. 2010, DOI 10.1007/s10479-009-0653-x). This mission formalizes the first step of the paper's analysis: the game has an equilibrium.

Setting

There are NNN users u=1,…,Nu=1,\dots,Nu=1,…,N and three tiers I={m,clet,cloud}I=\{m,\mathrm{clet},\mathrm{cloud}\}I={m,clet,cloud} (mobile device, cloudlet, cloud). User uuu chooses the fractions xu=(xu,m,xu,clet,xu,cloud)x_u=(x_{u,m},x_{u,\mathrm{clet}},x_{u,\mathrm{cloud}})xu​=(xu,m​,xu,clet​,xu,cloud​) of its tasks run on each tier. A profile is x=(x1,…,xN)∈R3Nx=(x_1,\dots,x_N)\in\mathbb R^{3N}x=(x1​,…,xN​)∈R3N.

The data are reals αu,βu,γu,δu\alpha_u,\beta_u,\gamma_u,\delta_uαu​,βu​,γu​,δu​ (arrival rates divided by service or transfer rates), powers Pu,m,Pu,t,Pu,max⁡P_{u,m},P_{u,t},P_{u,\max}Pu,m​,Pu,t​,Pu,max​, the number n≥1n\ge1n≥1 of cloudlet servers, the offloadable fraction χ∈(0,1]\chi\in(0,1]χ∈(0,1] and a utilisation cap Umax⁡U_{\max}Umax​. Assumption A requires Umax⁡U_{\max}Umax​ and every αu,δu\alpha_u,\delta_uαu​,δu​ to lie in (0,1)(0,1)(0,1).

User uuu's private feasible set is

K~u={xu∈R+3: ∑i∈Ixu,i=1, xu,clet+xu,cloud≤χ, αuPu,mxu,m+βuPu,t(xu,clet+xu,cloud)≤Pu,max⁡},\tilde K_u=\Big\{x_u\in\mathbb R^3_+:\ \textstyle\sum_{i\in I}x_{u,i}=1,\ x_{u,\mathrm{clet}}+x_{u,\mathrm{cloud}}\le\chi,\ \alpha_uP_{u,m}x_{u,m}+\beta_uP_{u,t}(x_{u,\mathrm{clet}}+x_{u,\mathrm{cloud}})\le P_{u,\max}\Big\},K~u​={xu​∈R+3​: ∑i∈I​xu,i​=1, xu,clet​+xu,cloud​≤χ, αu​Pu,m​xu,m​+βu​Pu,t​(xu,clet​+xu,cloud​)≤Pu,max​},

the shared constraint is Ω={x:1n∑vδvxv,clet≤Umax⁡}\Omega=\{x:\frac1n\sum_v\delta_vx_{v,\mathrm{clet}}\le U_{\max}\}Ω={x:n1​∑v​δv​xv,clet​≤Umax​}, and the joint feasible set is K=(∏uK~u)∩ΩK=\big(\prod_u\tilde K_u\big)\cap\OmegaK=(∏u​K~u​)∩Ω. User uuu minimises the mean response cost

λuRu(xu,x−u)=αuxu,m1−αuxu,m+βuxu,clet+γuxu,cloud+δuxu,clet1−1n∑vδvxv,clet\lambda_uR_u(x_u,x_{-u})=\frac{\alpha_ux_{u,m}}{1-\alpha_ux_{u,m}}+\beta_ux_{u,\mathrm{clet}}+\gamma_ux_{u,\mathrm{cloud}}+\frac{\delta_ux_{u,\mathrm{clet}}}{1-\frac1n\sum_v\delta_vx_{v,\mathrm{clet}}}λu​Ru​(xu​,x−u​)=1−αu​xu,m​αu​xu,m​​+βu​xu,clet​+γu​xu,cloud​+1−n1​∑v​δv​xv,clet​δu​xu,clet​​

over {y∈K~u:(y,x−u)∈Ω}\{y\in\tilde K_u:(y,x_{-u})\in\Omega\}{y∈K~u​:(y,x−u​)∈Ω}. A solution of the GNEP is a profile xˉ∈K\bar x\in Kxˉ∈K at which no user can lower its cost by a deviation that keeps the shared constraint satisfied.

The map F:R3N→R3NF:\mathbb R^{3N}\to\mathbb R^{3N}F:R3N→R3N stacks the users' partial gradients,

F(x)u=(αu(1−αuxu,m)2, βu+δu1−1n∑v≠uδvxv,clet(1−1n∑vδvxv,clet)2, γu),F(x)_u=\Big(\frac{\alpha_u}{(1-\alpha_ux_{u,m})^2},\ \beta_u+\delta_u\frac{1-\frac1n\sum_{v\ne u}\delta_vx_{v,\mathrm{clet}}}{\big(1-\frac1n\sum_v\delta_vx_{v,\mathrm{clet}}\big)^2},\ \gamma_u\Big),F(x)u​=((1−αu​xu,m​)2αu​​, βu​+δu​(1−n1​∑v​δv​xv,clet​)21−n1​∑v=u​δv​xv,clet​​, γu​),

and xˉ\bar xxˉ solves the variational inequality VI(K,F)\mathrm{VI}(K,F)VI(K,F) if xˉ∈K\bar x\in Kxˉ∈K and F(xˉ)⊤(x−xˉ)≥0F(\bar x)^\top(x-\bar x)\ge0F(xˉ)⊤(x−xˉ)≥0 for all x∈Kx\in Kx∈K. Such solutions are the variational (or normalized) solutions of the game.

Formalization targets

Goal: Proposition 1 (p. 12)

Under Assumption A, and provided every K~u\tilde K_uK~u​ is nonempty,

∃ xˉ∈K  ∀u  ∀y∈K~u with (y,xˉ−u)∈Ω:λuRu(xˉu,xˉ−u)≤λuRu(y,xˉ−u).\exists\,\bar x\in K\ \ \forall u\ \ \forall y\in\tilde K_u\ \text{with}\ (y,\bar x_{-u})\in\Omega:\quad \lambda_uR_u(\bar x_u,\bar x_{-u})\le\lambda_uR_u(y,\bar x_{-u}).∃xˉ∈K  ∀u  ∀y∈K~u​ with (y,xˉ−u​)∈Ω:λu​Ru​(xˉu​,xˉ−u​)≤λu​Ru​(y,xˉ−u​).

Milestones

  1. F(x)u=∇xuλuRu(x)F(x)_u=\nabla_{x_u}\lambda_uR_u(x)F(x)u​=∇xu​​λu​Ru​(x) wherever both denominators are positive (p. 11).
  2. For fixed x−ux_{-u}x−u​, user uuu's feasible set is convex and its cost is convex on it (p. 11).
  3. Every solution of VI(K,F)\mathrm{VI}(K,F)VI(K,F) is a solution of the GNEP (proof of Proposition 1).
  4. FFF is continuous on KKK, and KKK is compact and convex (proof of Proposition 1).
  5. VI(K,F)\mathrm{VI}(K,F)VI(K,F) has a solution (proof of Proposition 1, citing Facchinei–Pang, Corollary 2.2.5).

Milestones 3 and 5 give the goal; milestones 1 and 2 are what milestone 3 rests on, and milestone 4 is what milestone 5 rests on. The platform's Proved statement of Brouwer's fixed-point theorem (AGT.brouwer_fixed_point) is included as a reference item for milestone 5.

Significance

The result. Existence of an equilibrium is the precondition for everything else in the paper: the monotonicity of FFF (Theorem 1), the reformulation with a cloudlet price as an extended game (Theorem 2), and the distributed algorithm whose convergence is Theorem 3. Proposition 1 also shows that variational solutions exist, which is the specific equilibrium the paper's algorithm computes.

Formalizing it. The result is proved in the paper, in three lines that cite two textbook theorems. The work here is to make those citations machine-checked for this concrete model: that the closed-form FFF is indeed the stacked partial gradient, that each user's problem is convex despite the rational cost terms, that the VI-to-GNEP reduction holds, and that a VI on a compact convex set with continuous map has a solution. None of these steps is formalized in Mathlib for GNEPs; the last is a finite-dimensional Hartman–Stampacchia theorem, which Mathlib does not contain. No part of this paper has a machine-checked proof.

Difficulty

The obvious argument is to apply Kakutani's theorem to the best-response correspondence. With a shared constraint this needs lower semicontinuity of the feasible-set map x−u↦{y∈K~u:(y,x−u)∈Ω}x_{-u}\mapsto\{y\in\tilde K_u:(y,x_{-u})\in\Omega\}x−u​↦{y∈K~u​:(y,x−u​)∈Ω}, which is a separate argument, and Kakutani is not in Mathlib either. The VI route avoids it but has its own points. The cost has the rational terms αuxu,m/(1−αuxu,m)\alpha_ux_{u,m}/(1-\alpha_ux_{u,m})αu​xu,m​/(1−αu​xu,m​) and δuxu,clet/D(x)\delta_ux_{u,\mathrm{clet}}/D(x)δu​xu,clet​/D(x), and convexity and differentiability must be checked on the region where the denominators are positive; on a user's feasible set this needs Assumption A and the shared constraint, not the private constraints alone. The existence of a VI solution needs a fixed-point theorem on a compact convex set, and Mathlib has no Brouwer theorem. That is why the platform's statement of it is attached to this mission.

Formalization scope

Users are Fin N (0-based) and tiers an inductive type Tier with three constructors; a profile is Fin N → Tier → ℝ. The inner product a⊤ba^\top ba⊤b is the coordinatewise double sum (not Mathlib's sup norm on Pi types). The cost and FFF are the paper's closed forms; FFF is not defined as a derivative, so milestone 1 has content. Lean's x/0=0x/0=0x/0=0 makes both formulas junk where a denominator vanishes. Under Assumption A both denominators are positive on KKK and at every point the GNEP definition compares, and milestone 1 assumes the two positivity conditions explicitly.

Standing hypotheses in every statement: Assumption A, n≥1n\ge1n≥1, 0<χ≤10<\chi\le10<χ≤1. Nothing is assumed of βu,γu\beta_u,\gamma_uβu​,γu​ or the powers, as in the paper. Added hypothesis: every K~u\tilde K_uK~u​ is nonempty, in the goal and in milestone 5. The printed proposition is false without it: if 0<Pu,max⁡<min⁡(αuPu,m,βuPu,t)0<P_{u,\max}<\min(\alpha_uP_{u,m},\beta_uP_{u,t})0<Pu,max​<min(αu​Pu,m​,βu​Pu,t​) then K~u=∅\tilde K_u=\emptysetK~u​=∅, so K=∅K=\emptysetK=∅. The condition is equivalent to K≠∅K\ne\emptysetK=∅. Milestone 4 adds convexity of KKK to the paper's "continuous and compact".

Trivializing formalizations are ruled out: KKK cannot be empty under the added hypothesis, FFF is not a derivative by definition, no statement evaluates the cost at a point with a vanishing denominator, and the GNEP keeps the shared constraint in each player's feasible set (dropping it gives a different game, a NEP).

Contributions welcome: a finite-dimensional Hartman–Stampacchia theorem (reusable well beyond this mission), the general VI-implies-GNEP reduction for jointly convex games, and proofs of the model-specific milestones.

Selected references

  • V. Cardellini, V. De Nitto Personé, V. Di Valerio, F. Facchinei, V. Grassi, F. Lo Presti, V. Piccialli, A game-theoretic approach to computation offloading in mobile cloud computing, Mathematical Programming (2016). https://doi.org/10.1007/s10107-015-0881-6 (accepted manuscript: IRIS Sapienza, handle 11573/779661)
  • F. Facchinei, A. Fischer, V. Piccialli, On generalized Nash games and variational inequalities, Operations Research Letters 35 (2007). https://doi.org/10.1016/j.orl.2006.03.004
  • F. Facchinei, C. Kanzow, Generalized Nash equilibrium problems, Annals of Operations Research 175 (2010). https://doi.org/10.1007/s10479-009-0653-x
  • F. Facchinei, J.-S. Pang, Finite-Dimensional Variational Inequalities and Complementarity Problems, Springer, 2003. https://doi.org/10.1007/b97543
8 thms3 active usersReviewed
Operations ResearchOptimizationProbability·Captain: mikedeng1

Consumer Returns Policies and Supply Chain Performance 2: Under Consumer Returns, the Differentiated Buy-Back with b − l = s Coordinates the Supply Chain and Gives the Retailer a Share φResearch Paper

Motivation

Retailers in many categories accept returns of products that are not defective: a consumer buys, learns whether the product suits them, and may send it back for a refund. Returns of this kind are a large cost item in retailing, and the refund a retailer offers is an operational decision on a par with its price and its stocking quantity. Xuanming Su, Consumer Returns Policies and Supply Chain Performance (SSRN 1020451, version of August 2008; published in Manufacturing & Service Operations Management 11(4), 2009, doi:10.1287/msom.1080.0240), studies this decision first for a single seller and then in a supply chain.

This mission formalizes the supply chain part, Section 5 of the paper. A classical result of supply chain contracting is that a manufacturer can align a retailer's ordering decision with the interest of the whole chain by a buy-back contract, which pays the retailer a credit for unsold units (Cachon, Supply Chain Coordination with Contracts, 2003). Su shows that once the retailer also sets a consumer returns policy, the standard buy-back no longer coordinates, and identifies three contracts that do. The companion mission (mission 1 of this series) formalizes the single-seller results of Sections 3–4, in particular Proposition 2, which gives the supply chain optimum used here.

Setting

A consumer who buys at price ppp learns a valuation VVV, drawn independently from a law ν\nuν with finite mean μ=EV\mu = EVμ=EV, and then either keeps the product or returns it for the refund rrr. Keeping is optimal when V≥rV \ge rV≥r. Write

Gˉ(r)=P(V≥r),G(r)=P(V<r),\bar G(r) = \mathbb P(V \ge r), \qquad G(r) = \mathbb P(V < r),Gˉ(r)=P(V≥r),G(r)=P(V<r),

for the probabilities of keeping and returning. A consumer's expected utility from buying is Emax⁡(V,r)E\max(V,r)Emax(V,r), which is therefore the reservation price: all consumers buy if p≤Emax⁡(V,r)p \le E\max(V,r)p≤Emax(V,r) and none buys otherwise (the demand rule (6)). Market demand X≥0X \ge 0X≥0 has distribution function FFF and Fˉ=1−F\bar F = 1 - FFˉ=1−F; a stock q≥0q \ge 0q≥0 sells Emin⁡(X,q)E\min(X,q)Emin(X,q) in expectation when consumers buy, and nothing when they do not. Write S(p,q,r)S(p,q,r)S(p,q,r) for these expected sales. The production cost is ccc, leftover and returned units are salvaged at sss, and 0≤s<c<μ0 \le s < c < \mu0≤s<c<μ.

The total supply chain profit is

ΠT(p,q,r)=[(p−s)Gˉ(r)+(p−r)G(r)] S(p,q,r)−(c−s)q.(15)\Pi_T(p,q,r) = [(p-s)\bar G(r) + (p-r)G(r)]\,S(p,q,r) - (c-s)q. \tag{15}ΠT​(p,q,r)=[(p−s)Gˉ(r)+(p−r)G(r)]S(p,q,r)−(c−s)q.(15)

A manufacturer sells to a retailer, who sets ppp, qqq and (except in Proposition 4) rrr. The contracts are:

  • standard buy-back (w,b)(w,b)(w,b): wholesale price www, credit bbb per leftover unit; the retailer earns (14);
  • differentiated buy-back (w,b,l)(w,b,l)(w,b,l): credit bbb per unsold unit and b−lb-lb−l per returned unit; the retailer earns
ΠR(p,q,r)=[(p−b)Gˉ(r)+(p−r−l)G(r)] S(p,q,r)−(w−b)q;(31)\Pi_R(p,q,r) = [(p-b)\bar G(r) + (p-r-l)G(r)]\,S(p,q,r) - (w-b)q; \tag{31}ΠR​(p,q,r)=[(p−b)Gˉ(r)+(p−r−l)G(r)]S(p,q,r)−(w−b)q;(31)
  • direct-to-manufacturer returns with a buy-back (w,b)(w,b)(w,b): consumers return to the manufacturer, who sets rrr; the profits are (19) and (21);
  • sales rebate (w,u)(w,u)(w,u): a rebate uuu per unit sold, returned or not; the retailer earns (25).

The supply chain optimum, from Proposition 2 of the paper, is

pSC=Emax⁡(V,s),Fˉ(qSC)=c−sEmax⁡(V,s)−s,rSC=s.p^{SC} = E\max(V,s), \qquad \bar F(q^{SC}) = \frac{c-s}{E\max(V,s)-s}, \qquad r^{SC} = s.pSC=Emax(V,s),Fˉ(qSC)=Emax(V,s)−sc−s​,rSC=s.

Formalization targets

Goal: Proposition 3 (p. 16)

For ϕ∈[0,1]\phi \in [0,1]ϕ∈[0,1] and ϕˉ=1−ϕ\bar\phi = 1-\phiϕˉ​=1−ϕ, the differentiated buy-back

w=ϕc+ϕˉ Emax⁡(V,s),b=ϕs+ϕˉ Emax⁡(V,s),b−l=sw = \phi c + \bar\phi\,E\max(V,s), \qquad b = \phi s + \bar\phi\,E\max(V,s), \qquad b - l = sw=ϕc+ϕˉ​Emax(V,s),b=ϕs+ϕˉ​Emax(V,s),b−l=s

makes the supply chain optimum a retailer optimum and gives the retailer the share ϕ\phiϕ:

ΠR(p,q,r)≤ΠR(pSC,qSC,rSC)  ∀p,r, q≥0,ΠR(pSC,qSC,rSC)=ϕ ΠT(pSC,qSC,rSC),\Pi_R(p,q,r) \le \Pi_R(p^{SC},q^{SC},r^{SC}) \ \ \forall p, r,\ q \ge 0, \qquad \Pi_R(p^{SC},q^{SC},r^{SC}) = \phi\,\Pi_T(p^{SC},q^{SC},r^{SC}),ΠR​(p,q,r)≤ΠR​(pSC,qSC,rSC)  ∀p,r, q≥0,ΠR​(pSC,qSC,rSC)=ϕΠT​(pSC,qSC,rSC),

and the contract is implementable: w≥bw \ge bw≥b, l≥0l \ge 0l≥0, b−l≥sb - l \ge sb−l≥s.

Milestones

  1. Under a standard buy-back the retailer's optimal refund is r∗=br^* = br∗=b (Sec. 5.1, p. 15).
  2. Under (31) the retailer's optimum is p∗=Emax⁡(V,b−l)p^* = E\max(V,b-l)p∗=Emax(V,b−l), Fˉ(q∗)=(w−b)/(Emax⁡(V,b−l)−b)\bar F(q^*) = (w-b)/(E\max(V,b-l)-b)Fˉ(q∗)=(w−b)/(Emax(V,b−l)−b), r∗=b−lr^* = b-lr∗=b−l (proof of Proposition 3, p. 27).
  3. Under (16)–(18), w−b=ϕ(c−s)w - b = \phi(c-s)w−b=ϕ(c−s) and Emax⁡(V,b−l)−b=ϕ[Emax⁡(V,s)−s]E\max(V,b-l) - b = \phi[E\max(V,s)-s]Emax(V,b−l)−b=ϕ[Emax(V,s)−s] ((32)–(33)).
  4. At (Emax⁡(V,s),q,s)(E\max(V,s), q, s)(Emax(V,s),q,s) the retailer earns ϕ ΠT\phi\,\Pi_TϕΠT​ ((34)–(39)).
  5. Retailer plus manufacturer profit under direct returns is ΠT\Pi_TΠT​ (Sec. 5.3, p. 17).
  6. Proposition 4: with direct-to-manufacturer returns and the buy-back (22)–(23), the chain optimum is a Nash equilibrium between retailer and manufacturer, with retailer share ϕ\phiϕ.
  7. Proposition 5: the sales rebate u=Emax⁡(V,s)−sc−s(w−c)u = \frac{E\max(V,s)-s}{c-s}(w-c)u=c−sEmax(V,s)−s​(w−c) makes the chain optimum a retailer optimum.
  8. With a rebate paid on kept units only, the retailer's optimal refund is r∗=s−u<sr^* = s - u < sr∗=s−u<s (Sec. 5.4, p. 19).

Significance

The results separate what a contract must observe in order to coordinate a chain with consumer returns: either the manufacturer distinguishes returned from unsold units (Propositions 3 and 4), or it observes sales (Proposition 5). The negative results (milestones 1 and 8) show why the standard buy-back and a kept-only rebate fail: each distorts the retailer's refund away from the salvage value. These statements are proved in the paper by short arguments; none of them has, to the knowledge of this mission, a machine-checked proof. Formalizing them yields a reusable model of a newsvendor with an endogenous price and refund under valuation uncertainty, and a checked account of the coordination conditions, including the boundary cases (ϕ=0\phi = 0ϕ=0, atoms in the valuation law) that the paper does not discuss.

Difficulty

Each result combines two optimizations, and neither is routine at the generality of the formal statements. The first is over price and refund jointly: the demand rule makes every profit discontinuous in ppp and rrr, and the refund problem must be solved for an arbitrary valuation law, where atoms make the tie rule at V=rV = rV=r matter. The second is a newsvendor problem in qqq for an arbitrary demand law: the paper writes the optimal stock as Fˉ−1\bar F^{-1}Fˉ−1 of a fractile, which presumes a continuous, strictly increasing FFF, whereas here FFF may jump or be flat and the optimal stock is any solution of the fractile equation. The obvious reduction, "the retailer's profit is ϕ ΠT\phi\,\Pi_TϕΠT​, so its maximizer is the chain's", is not available: that identity holds only at the chain's price and refund, and away from them the retailer's profit is not proportional to ΠT\Pi_TΠT​. In Proposition 4 the manufacturer's deviation to a refund below sss acts on the consumers' purchase decision, and the paper's remark that no one then buys is false when V≥sV \ge sV≥s almost surely, so that case needs its own argument.

Formalization scope

Prices, refunds, costs, quantities and profits are real numbers. The valuation law ν\nuν is a probability measure on R\mathbb RR with integrable identity (a strict generalization of the paper's density ggg); Gˉ(r)=ν([r,∞))\bar G(r) = \nu([r,\infty))Gˉ(r)=ν([r,∞)) and G(r)=ν((−∞,r))G(r) = \nu((-\infty,r))G(r)=ν((−∞,r)), matching the rule "keep iff V≥rV \ge rV≥r". The demand law DDD is a probability measure on R\mathbb RR with D((−∞,0))=0D((-\infty,0)) = 0D((−∞,0))=0, and Emin⁡(X,q)E\min(X,q)Emin(X,q) is SupplyChainTheory.expSales from the published module SupplyChainTheory_contracts. Every profit includes the demand rule (6): without it, (15) and (31) are unbounded in ppp. Optimization is over all real ppp and rrr and all q≥0q \ge 0q≥0, nonnegative stocks and demand being the paper's setting; with negative stocks the profits are unbounded. Optimality of the paper's closed-form triple is claimed, never uniqueness, and "induces the retailer to maximize supply chain profit" is stated as "the chain-optimal triple is a retailer optimum"; that the triple maximizes ΠT\Pi_TΠT​ is Proposition 2, formalized in mission 1, and not restated. The optimal stock is any solution of the fractile equation, and no continuity of DDD is assumed. The Nash equilibrium of Proposition 4 is written as the two best-response inequalities. Proposition 5 adds the hypothesis w≥sw \ge sw≥s, implied by the paper's range w≥cw \ge cw≥c (p. 19) and necessary: for w<sw < sw<s the retailer's profit is unbounded. The kept-only rebate of Sec. 5.4 has no printed formula; its profit is (24) with the rebate removed from the returned-units term. Printed page numbers equal PDF page numbers throughout the source. A formalization in which the retailer's profit is defined as ϕ ΠT\phi\,\Pi_TϕΠT​, or in which the optimization is restricted to r=sr = sr=s, would make the goal trivial and is excluded: (31) is stated with free www, bbb, lll, and the contract enters only through hypotheses.

The model module (SuReturns.Coordination.Model) restates the single-seller objects of mission 1 in this sub-namespace. Contributions welcome: proofs of the two optimization steps as reusable lemmas (the refund step for a general valuation law and the newsvendor step for an arbitrary demand law), which serve every milestone here.

Selected references

  • X. Su, Consumer Returns Policies and Supply Chain Performance, SSRN working paper 1020451, version of August 2008. https://ssrn.com/abstract=1020451 ; published in Manufacturing & Service Operations Management 11(4), 2009. https://doi.org/10.1287/msom.1080.0240
  • G. P. Cachon, Supply Chain Coordination with Contracts, in Handbooks in Operations Research and Management Science, vol. 11, 2003. https://doi.org/10.1016/S0927-0507(03)11006-7
  • B. A. Pasternack, Optimal Pricing and Return Policies for Perishable Commodities (the buy-back contract), Marketing Science 4(2), 1985. https://doi.org/10.1287/mksc.4.2.166
12 thms3 active usersReviewed
Linear OptimizationOptimization·Captain: mikedeng1

Bimatrix Equilibrium Points and Mathematical Programming: If Z Is Non-Degenerate and uᵀMu ≥ 0, uᵀMu = 0 ⇒ Mu + Mᵀu = 0 for All u ≥ 0, a Non-Empty Z Has an Equilibrium PointResearch Paper

Motivation

The linear complementarity problem asks, for a real square matrix MMM of order nnn and a vector q∈Rnq\in\mathbb R^nq∈Rn, for a vector zzz with

z≥0,w=Mz−q≥0,zTw=0.z\ge 0,\qquad w=Mz-q\ge 0,\qquad z^{\mathsf T}w=0 .z≥0,w=Mz−q≥0,zTw=0.

It is the common form of the Kuhn–Tucker conditions of linear and convex quadratic programs and of the equilibrium conditions of two-person non-zero-sum (bimatrix) games. In 1964 Lemke and Howson gave a constructive existence proof for equilibrium points of bimatrix games by following a path of adjacent extreme points of a polyhedron (Lemke–Howson 1964). In 1965 Lemke adapted that path-following technique to the general problem above, under a condition on MMM that covers the positive semidefinite case treated by Dantzig and Cottle and the case M>0M>0M>0 (Lemke 1965). The resulting procedure, now called Lemke's algorithm or complementary pivoting, became a standard method for linear complementarity problems and a template for later path-following existence proofs (Cottle, Pang, Stone 1992).

Timeline:

  • 1964: Lemke and Howson, adjacent-extreme-point path for bimatrix games.
  • 1965: Lemke, existence for matrices satisfying conditions (i)–(ii) below (the goal of this mission), under a non-degeneracy assumption, by an augmented path with an artificial variable z0z_0z0​.
  • Later literature names matrices with (i)–(ii) copositive-plus, and removes non-degeneracy by lexicographic perturbation.

Setting

Fix a finite index set of size nnn, a real n×nn\times nn×n matrix MMM and q∈Rnq\in\mathbb R^nq∈Rn. Inequalities between vectors are componentwise and eee is the all-ones vector.

  • The set Z={z∈Rn:z≥0, w=Mz−q≥0}Z=\{z\in\mathbb R^n : z\ge 0,\ w=Mz-q\ge 0\}Z={z∈Rn:z≥0, w=Mz−q≥0}; www is always the function Mz−qMz-qMz−q of zzz.
  • An equilibrium point is a point z∈Zz\in Zz∈Z with zTw=0z^{\mathsf T}w=0zTw=0; SSS is the set of them.
  • For any z∈Rnz\in\mathbb R^nz∈Rn, the matrix N(z)N(z)N(z) consists of the columns of (MT,I)(M^{\mathsf T},I)(MT,I) that are kept when one deletes the iii-th column of MTM^{\mathsf T}MT whenever wi≠0w_i\ne 0wi​=0 and the iii-th column of III whenever zi≠0z_i\ne0zi​=0.
  • An extreme point of ZZZ is a point z∈Zz\in Zz∈Z with rank⁡N(z)=n\operatorname{rank}N(z)=nrankN(z)=n; zzz lies on an open edge if z∈Zz\in Zz∈Z and rank⁡N(z)=n−1\operatorname{rank}N(z)=n-1rankN(z)=n−1. An open edge is the set of points of ZZZ sharing the matrix N(z)N(z)N(z) of such a point; a ray is an open edge with exactly one end-point.
  • ZZZ is non-degenerate if for every z∈Rnz\in\mathbb R^nz∈Rn the columns of N(z)N(z)N(z) are linearly independent.
  • For an index sss, Zs={z∈Z:zTw=zsws}Z_s=\{z\in Z : z^{\mathsf T}w=z_sw_s\}Zs​={z∈Z:zTw=zs​ws​}. An adjacency path is a non-empty connected class of closed edges of ZZZ no three of which meet; its end-points are the extreme points lying on exactly one of its edges.
  • The augmented sets: Z∗={(z,z0):z≥0, z0≥0, Mz+z0e−q≥0}Z^*=\{(z,z_0) : z\ge0,\ z_0\ge0,\ Mz+z_0e-q\ge0\}Z∗={(z,z0​):z≥0, z0​≥0, Mz+z0​e−q≥0}, its subset Z0∗Z_0^*Z0∗​ where zTw=0z^{\mathsf T}w=0zTw=0, and, for a number kkk, Z∗∗Z^{**}Z∗∗, the set of the form above for the bordered data (Me−eT0)\begin{pmatrix}M&e\\-e^{\mathsf T}&0\end{pmatrix}(M−eT​e0​), (q−k)\begin{pmatrix}q\\-k\end{pmatrix}(q−k​).

Formalization targets

Goal: Theorem 4 (p. 7)

Suppose ZZZ is non-degenerate and that for every u≥0u\ge0u≥0

(i) uTMu≥0,(ii) uTMu=0 ⟹ Mu+MTu=0.\text{(i)}\ u^{\mathsf T}Mu\ge 0,\qquad \text{(ii)}\ u^{\mathsf T}Mu=0\ \Longrightarrow\ Mu+M^{\mathsf T}u=0 .(i) uTMu≥0,(ii) uTMu=0 ⟹ Mu+MTu=0.

Then

Z≠∅ ⟹ ∃z∈Z, zT(Mz−q)=0.Z\ne\emptyset\ \Longrightarrow\ \exists z\in Z,\ z^{\mathsf T}(Mz-q)=0 .Z=∅ ⟹ ∃z∈Z, zT(Mz−q)=0.

Milestones, in the order the paper's proof uses them

  1. Theorem 1 (p. 3): for non-degenerate ZZZ, ZsZ_sZs​ is empty or a disjoint union of adjacency paths whose end-points are exactly the equilibrium points.
  2. Lemma 2 (p. 4): Z=∅Z=\emptysetZ=∅ iff some u≥0u\ge0u≥0 has MTu≤0M^{\mathsf T}u\le0MTu≤0, uTq>0u^{\mathsf T}q>0uTq>0.
  3. Theorem 2 (p. 4): if some ZsZ_sZs​ contains precisely one ray of a non-degenerate ZZZ, the number of equilibrium points is odd.
  4. p. 6: for kkk chosen as in (12), the starting ray E0∗E_0^*E0∗​ (z=0z=0z=0) is a ray of Z∗∗Z^{**}Z∗∗ inside Z0∗∗Z_0^{**}Z0∗∗​, and it is the only one.
  5. Lemma 2 (p. 6): Z∗∗Z^{**}Z∗∗ has an equilibrium point.
  6. Lemma 3 (p. 7): a ray (zˉ+θu,zˉ0+θu0)(\bar z+\theta u,\bar z_0+\theta u_0)(zˉ+θu,zˉ0​+θu0​) of Z∗Z^*Z∗ in Z0∗Z_0^*Z0∗​ with eTu=1e^{\mathsf T}u=1eTu=1 satisfies uTMu+u0=0u^{\mathsf T}Mu+u_0=0uTMu+u0​=0.
  7. (22)–(25) (pp. 7–8): under (i)–(ii) such a ray has zˉ0=0\bar z_0=0zˉ0​=0 and zˉ\bar zzˉ an equilibrium point of ZZZ, or zˉ0>0\bar z_0>0zˉ0​>0 and Z=∅Z=\emptysetZ=∅.

Companion results

The Corollary (p. 5: q=eq=eq=e, M>0M>0M>0 gives an odd number of equilibrium points), Theorem 3 (p. 5: if zTMz≥0z^{\mathsf T}Mz\ge0zTMz≥0 for all zzz, at most one equilibrium point) and Theorem 5 (p. 8: if moreover Z≠∅Z\ne\emptysetZ=∅, ZZZ has at least nnn rays).

Significance

Theorem 4 is an existence theorem for a class of linear complementarity problems that contains convex quadratic programming (the case zTMz≥0z^{\mathsf T}Mz\ge0zTMz≥0 for all zzz) and strictly positive matrices, and its proof is an algorithm: the path followed is the sequence of pivots of Lemke's method. The parity statements (Theorem 2, the Corollary) are an early instance of the path-following parity arguments later abstracted in the complexity class PPAD (Papadimitriou 1994).

The theorem is classical and proved. To our knowledge neither Lemke's theorem nor the polyhedral path machinery of Theorems 1–2 has a machine-checked proof in Lean or Mathlib. This mission produces the vocabulary of non-degenerate complementarity polyhedra (the matrix N(z)N(z)N(z), open edges, rays, adjacency paths), the parity theorem, and the existence theorem itself; the Farkas-type Lemma 2 (p. 4) is already available on the platform.

Difficulty

The algebraic part (Lemma 3 and (22)–(25)) is short. The difficulty is combinatorial-geometric: Theorem 1 requires that, under non-degeneracy, every extreme point of ZZZ has exactly nnn incident edges, that each point of ZsZ_sZs​ is an extreme point or lies on an open edge, and that the edges contained in ZsZ_sZs​ form paths whose end-points are exactly the equilibrium points; the parity of Theorem 2 then needs finiteness of the set of extreme points. None of this polyhedral structure (edges as zero-pattern classes, their closures and end-points) is in Mathlib. Moreover, the printed proof of Theorem 4 applies Theorem 2 to Z∗∗Z^{**}Z∗∗, whose non-degeneracy the paper obtains from an informal perturbation remark, and it sketches the step from the end of the augmented path to a ray of Z∗Z^*Z∗; a complete proof of the goal must supply these steps or take another route.

Formalization scope

  • Vectors are functions from a finite index type ι\iotaι to R\mathbb RR (n=∣ι∣n=|\iota|n=∣ι∣; Fin n\mathrm{Fin}\,nFinn is a special case); the bordered system lives on ι⊕{∗}\iota\oplus\{\ast\}ι⊕{∗}. www is always Mz−qMz-qMz−q, never a free variable.
  • N(z)N(z)N(z) is the indexed family of its columns, rank⁡N(z)\operatorname{rank}N(z)rankN(z) the dimension of their span; "rank⁡N(z)=n−1\operatorname{rank}N(z)=n-1rankN(z)=n−1" is written rank⁡N(z)+1=n\operatorname{rank}N(z)+1=nrankN(z)+1=n.
  • Non-degeneracy (Def. 3) is linear independence of the columns of N(z)N(z)N(z) for every z∈Rnz\in\mathbb R^nz∈Rn. The phrase "(but not all)" is read as excluding only the empty matrix; the other reading differs only when q=0q=0q=0, and the formal definition is then the stronger hypothesis.
  • An open edge is the set of points of ZZZ with the zero pattern of a point z0z_0z0​ with rank⁡N(z0)=n−1\operatorname{rank}N(z_0)=n-1rankN(z0​)=n−1; closed edges are closures; end-points of an open edge EEE are the points of E‾∖E\overline E\setminus EE∖E; a ray has exactly one. Adjacency paths are classes of closed edges.
  • Conditions (i)–(ii) are quantified over u≥0u\ge0u≥0 only. "Non-negative definite" (Theorems 3, 5) is zTMz≥0z^{\mathsf T}Mz\ge0zTMz≥0 for all zzz, with no symmetry assumed.
  • "An odd number" is finiteness plus odd cardinality; "at least nnn rays" counts rays as an extended natural number; "at most one" is a subsingleton.
  • Equilibrium points include membership in ZZZ: zT(Mz−q)=0z^{\mathsf T}(Mz-q)=0zT(Mz−q)=0 alone holds at z=0z=0z=0 and would make the goal trivial. The goal mentions neither Z∗Z^*Z∗, Z∗∗Z^{**}Z∗∗, kkk, rays nor paths; in particular non-degeneracy of Z∗∗Z^{**}Z∗∗ is not a hypothesis of the goal.
  • Deviations: Lemma 2 (p. 6) assumes non-degeneracy of Z∗∗Z^{**}Z∗∗ (Def. 3 does not define it for the non-square Z∗Z^*Z∗); milestone 4 holds for every kkk without non-degeneracy; Lemma 3 and (22)–(25) parametrize the ray as in (15) without requiring zˉ∗\bar z^*zˉ∗ to be an extreme point, which makes them stronger.

Contributions welcome: the polyhedral lemmas for non-degenerate ZZZ (extreme points have nnn edges, finitely many extreme points), the parity argument, and any complete route to Theorem 4.

Selected references

  • C. E. Lemke, Bimatrix Equilibrium Points and Mathematical Programming, Management Science 11(7):681–689, 1965. https://doi.org/10.1287/mnsc.11.7.681 (cited from the HAL deposit hal-01885823v1)
  • C. E. Lemke, J. T. Howson, Equilibrium Points of Bimatrix Games, J. SIAM 12(2):413–423, 1964. https://doi.org/10.1137/0112033
  • R. W. Cottle, J.-S. Pang, R. E. Stone, The Linear Complementarity Problem, Academic Press 1992; SIAM Classics 2009. https://doi.org/10.1137/1.9780898719000
  • C. H. Papadimitriou, On the complexity of the parity argument and other inefficient proofs of existence, J. Computer and System Sciences 48(3):498–532, 1994. https://doi.org/10.1016/S0022-0000(05)80063-7
10 thms3 active usersReviewed
Operations ResearchOptimizationProbability·Captain: mikedeng1

Information Sharing in a Supply Chain with a Common Retailer 2: Under Production Economy the Retailer Earns Weakly More from Sequential Information Contracting and the Manufacturers from ConcurrentResearch Paper

Motivation

Large retailers hold point-of-sale and loyalty-card data that their suppliers cannot observe, and many of them sell access to it through data-sharing programs; others share the same data for free, or with only some suppliers (Shang, Ha & Tong 2016, §1). When two competing manufacturers sell through one common retailer, sharing a demand signal with a manufacturer changes how he sets his wholesale price, which in turn changes the retailer's margins and the rival's demand. Whether the retailer wants to share, with how many manufacturers, and at what price, is therefore a question about a multistage game with incomplete information.

Shang, Ha and Tong answer it for linear demand, a linear-expectation signal and quadratic production costs, under two contracting protocols. This mission covers the production economy case (marginal cost decreasing in volume, §6 of the paper), in which the retailer may have an incentive to share information even without payment. A companion mission covers production diseconomy (§5).

Setting

Two manufacturers i∈{0,1}i \in \{0,1\}i∈{0,1} sell substitutable products through a common retailer. Demand for product iii is

qi=a+θ−(1+ϕ)pi+ϕpj,q_i = a + \theta - (1+\phi)p_i + \phi p_j ,qi​=a+θ−(1+ϕ)pi​+ϕpj​,

where pip_ipi​ is the retail price, ϕ>0\phi > 0ϕ>0 measures competition intensity and θ\thetaθ is a demand shock with mean 000 and variance σ2>0\sigma^2 > 0σ2>0. The retailer observes a demand signal YYY with E[Y∣θ]=θE[Y \mid \theta] = \thetaE[Y∣θ]=θ and a linear-expectation structure E[θ∣Y]=βYE[\theta \mid Y] = \beta YE[θ∣Y]=βY, where β=β(t,σ)\beta = \beta(t,\sigma)β=β(t,σ) is the signal weight. Producing qqq units costs bq−ceq2bq - c_e q^2bq−ce​q2 with ce>0c_e > 0ce​>0; the paper writes c=−cec = -c_ec=−ce​ and assumes ce<2/(1+ϕ)c_e < 2/(1+\phi)ce​<2/(1+ϕ) (the Assumption, p. 251). Retailing is costless.

The game has three stages.

  1. Information contracting. Under concurrent contracting the retailer offers both manufacturers the same payment T≥0T \ge 0T≥0 for the signal; they decide simultaneously and play a Pareto-optimal pure equilibrium. Under sequential contracting she offers a payment TfT_fTf​ to a first manufacturer kkk and, after his decision, a payment TsT_sTs​ to the other; the outcome is a subgame-perfect equilibrium (SPE). The retailer commits not to share for free after a rejection (§6.2).
  2. Pricing. Given the information statuses Xi∈{I,U}X_i \in \{I, U\}Xi​∈{I,U}, each manufacturer sets a wholesale price wiw_iwi​ (a function of YYY if informed, a constant otherwise), then the retailer sets retail prices; the solution concept is Bayesian Nash equilibrium.
  3. Demand realizes and profits are collected.

The ex ante profits of the pricing equilibrium are denoted πM(0)\pi_M(0)πM​(0), πMU(1)\pi_M^U(1)πMU​(1), πMI(1)\pi_M^I(1)πMI​(1), πM(2)\pi_M(2)πM​(2) for a manufacturer and πR(n)\pi_R(n)πR​(n) for the retailer, nnn the number of informed manufacturers. neNn_e^NneN​, neCn_e^CneC​, neSn_e^SneS​ denote the equilibrium number of informed manufacturers without contracting, under concurrent and under sequential contracting.

Formalization targets

Goal: Proposition 8(d)

For every ϕ>0\phi > 0ϕ>0 and 0<ce<2/(1+ϕ)0 < c_e < 2/(1+\phi)0<ce​<2/(1+ϕ), pricing equilibria exist, concurrent outcomes and sequential SPEs exist, and for every concurrent outcome and every SPE (either first mover)

ΠRC≤ΠRS,ΠMS≤ΠMC,\Pi_R^C \le \Pi_R^S, \qquad \Pi_M^S \le \Pi_M^C ,ΠRC​≤ΠRS​,ΠMS​≤ΠMC​,

where ΠR\Pi_RΠR​ is the retailer's profit after side payments and ΠM\Pi_MΠM​ the manufacturers' total profit net of them. The second inequality is asserted for all cec_ece​ except at most two values depending only on ϕ\phiϕ. The comparisons about every pricing equilibrium family exclude the single value ce∗=(2+3ϕ)/[(1+2ϕ)(1+ϕ)]c_e^* = (2+3\phi)/[(1+2\phi)(1+\phi)]ce∗​=(2+3ϕ)/[(1+2ϕ)(1+ϕ)] (see Formalization scope). The paper says "higher"; the inequalities are weak because both sides coincide on intervals of positive length.

Milestones

  1. Lemma 1: the pricing equilibrium exists and, for ce≠ce∗c_e \ne c_e^*ce​=ce∗​, is unique and linear in YYY with explicit coefficients.
  2. §4.2: the ex ante profits πM(⋅)\pi_M(\cdot)πM​(⋅) and πR(⋅)\pi_R(\cdot)πR​(⋅) in closed form.
  3. Lemma 5(a)–(c) and Lemma 5(d): sign comparisons of these profits in cec_ece​, with thresholds 1/(1+ϕ)1/(1+\phi)1/(1+ϕ), (4+5ϕ)/[(2+3ϕ)(1+ϕ)](4+5\phi)/[(2+3\phi)(1+\phi)](4+5ϕ)/[(2+3ϕ)(1+ϕ)], ceac_e^acea​ and ceNc_e^NceN​.
  4. Proposition 7: thresholds ceCc_e^CceC​, ceSc_e^SceS​ such that
neZ=0 for ce<11+ϕ,neZ=2 for 11+ϕ≤ce<ceZ,neZ=1 for ceZ≤ce<21+ϕ.n_e^Z = 0 \text{ for } c_e < \tfrac{1}{1+\phi}, \quad n_e^Z = 2 \text{ for } \tfrac{1}{1+\phi} \le c_e < c_e^Z, \quad n_e^Z = 1 \text{ for } c_e^Z \le c_e < \tfrac{2}{1+\phi}.neZ​=0 for ce​<1+ϕ1​,neZ​=2 for 1+ϕ1​≤ce​<ceZ​,neZ​=1 for ceZ​≤ce​<1+ϕ2​.
  1. Proposition 6(b): the same structure for neNn_e^NneN​ with a threshold ceNc_e^NceN​.
  2. Proposition 8(a): ceN<ceS≤ceCc_e^N < c_e^S \le c_e^CceN​<ceS​≤ceC​.

Significance

Proposition 8(d) says that a common retailer who sells information prefers to sell it sequentially, and that the manufacturers bear the cost: sequential offers let her extract a larger payment from the first manufacturer, because his outside option depends on what she will do with the second. Together with Propositions 6 and 7 it explains why retailers under production economy share with only a subset of suppliers once economies of scale or competition are strong, and why a retailer may share data for free, a practice the diseconomy model cannot produce.

The results are proved in the paper, partly by "it is straightforward" arguments (the proofs of Lemmas 2–5 are omitted). No part of the paper is formalized. A formalization adds a machine-checked account of the equilibrium selection at the boundary payments, where the paper's case analysis is informal, and of the points at which the retailer is indifferent between outcomes.

Difficulty

The pricing stage is a Bayesian game with a continuum of strategies: an informed manufacturer's strategy is an arbitrary square-integrable function of the signal. Lemma 1's uniqueness needs the Assumption (without it the manufacturer's problem is not concave) and a conditional-expectation argument, not a finite-dimensional computation. The comparisons of Lemma 5 are sign conditions on rational functions of (ce,ϕ)(c_e, \phi)(ce​,ϕ) whose thresholds ceac_e^acea​, ceNc_e^NceN​ are implicit roots. The contracting stage is where the naive argument fails: at the boundary payments several equilibria give the retailer the same payoff but the manufacturers different payoffs, so "the" outcome is not well defined there, and a direct comparison of closed-form profits at the paper's selected equilibria does not cover every equilibrium.

Formalization scope

Lean represents manufacturers by Fin 2, statuses by an inductive type with informed and uninformed, and a pricing strategy by a function of the signal value. The committed conventions are these.

  1. Admissible strategies are measurable with square-integrable wi(Y)w_i(Y)wi​(Y), and constant for an uninformed manufacturer; ex ante optimality over them is the Bayesian equilibrium condition.
  2. The retailer's rule is a best response for every wholesale price pair and signal value, off path included.
  3. The production cost is the uncapped quadratic bq−ceq2bq - c_e q^2bq−ce​q2. The paper caps the quantity at qˉ=b/(2ce)\bar q = b/(2c_e)qˉ​=b/(2ce​) but assumes the cap is reached with negligible probability (footnote 11, p. 251) and computes every result of §4.2 and §6 without it. The condition b<ab < ab<a of that footnote is not imposed.
  4. Contracting uses pure strategies, nonnegative payments, and no free-sharing move after a rejection.
  5. A concurrent outcome is a payment and a pure equilibrium whose retailer payoff equals the supremum of her payoffs over Pareto-optimal equilibria. The supremum is not always attained: for large cec_ece​ the paper's optimal payment πMI(1)−πM(0)\pi_M^I(1) - \pi_M(0)πMI​(1)−πM​(0) makes (U,U)(U,U)(U,U) an equilibrium that Pareto-dominates the one-informed outcome it selects.
  6. Threshold statements take the two-clause form: the stated value of nnn is attained on each region with its printed endpoints, and is the only value on the region's interior. Thresholds depend only on ϕ\phiϕ and are quantified before all other parameters.
  7. The manufacturers' comparison in the goal excludes at most two values of cec_ece​. At the thresholds ceCc_e^CceC​, ceSc_e^SceS​ outcomes with different manufacturer totals coexist, and the universal comparison fails.
  8. A correction of the paper. At ce∗=(2+3ϕ)/[(1+2ϕ)(1+ϕ)]c_e^* = (2+3\phi)/[(1+2\phi)(1+\phi)]ce∗​=(2+3ϕ)/[(1+2ϕ)(1+ϕ)], which lies in (1/(1+ϕ),2/(1+ϕ))(1/(1+\phi), 2/(1+\phi))(1/(1+ϕ),2/(1+ϕ)), the slope of the best-response wholesale price (2) is exactly −1-1−1. The equations wi=w^i(wj)w_i = \hat w_i(w_j)wi​=w^i​(wj​) are then singular, and every status profile has a continuum of pricing equilibria (for n=0n = 0n=0, w1,2=wˉ±tw_{1,2} = \bar w \pm tw1,2​=wˉ±t for every ttt) whose ex ante profits differ. Lemma 1's uniqueness claim fails there, so do the §4.2 identities for every equilibrium family, and so does every statement built on them. Each statement that quantifies over all pricing equilibria therefore assumes ce≠ce∗c_e \ne c_e^*ce​=ce∗​; existence is still asserted at ce∗c_e^*ce∗​.

The ex ante profits in every statement are those of an equilibrium of the pricing game on the signal model, not the §4.2 closed forms; a formalization that defined them by the closed forms would reduce the goal to algebra and a 2×22 \times 22×2 game, and is ruled out. The model layer (signal model, pricing equilibrium, payoff table, both contracting games) is shared, name for name, with the production diseconomy mission. Contributions are welcome on each milestone, and on reusable pieces: linear-expectation signals, and pointwise optimization under conditional expectation.

Selected references

  • Shang W., Ha A. Y., Tong S., Information Sharing in a Supply Chain with a Common Retailer, Management Science 62(1):245–263, 2016. https://doi.org/10.1287/mnsc.2014.2127
  • Ericson W. A., A note on the posterior mean of a population mean, Journal of the Royal Statistical Society B 31(2):332–334, 1969 (cited for the formula of β(t,σ)\beta(t,\sigma)β(t,σ), which this mission does not use).
  • Vives X., Oligopoly Pricing: Old Ideas and New Tools, MIT Press, 1999, §2.7.2.
  • Li L., Information sharing in a supply chain with horizontal competition, Management Science 48(9):1196–1212, 2002. https://doi.org/10.1287/mnsc.48.9.1196.177
19 thms3 active usersReviewed
Dynamical SystemsProbabilityStochastic Systems·Captain: mikedeng1

On the Global Convergence of Stochastic Fictitious Play III: Almost Sure Convergence to Linearly Stable Rest Points in Potential GamesResearch Paper

Motivation

Stochastic fictitious play is a basic model of learning in repeated games. Each period every player best responds to the empirical frequencies of the opponents' past play, after the player's payoffs have been hit by a fresh random shock. It was introduced by Fudenberg and Kreps (1993), is a standard object in the theory of learning in games (Fudenberg and Levine, The Theory of Learning in Games, 1998), and underlies the quantal-response and logit-learning models used in experimental economics and multi-agent reinforcement learning. The question is whether the players' beliefs settle down, and on what.

Potential games, in which all players receive the same payoff, cover pure coordination games and, after the usual payoff transformations, congestion games and weighted potential games. For them Hofbauer and Sandholm (Econometrica 70, 2002) proved that stochastic fictitious play converges almost surely, and that under a generic regularity condition the limit is a single linearly stable rest point of the perturbed best response dynamic.

Timeline. Fudenberg and Kreps (1993) and Kaniovski and Young (1995) established convergence in 2×2 games. Benaïm and Hirsch (1999) related the process to its mean ordinary differential equation and proved convergence in some ppp player, two strategy games. Hofbauer (2000) and Hofbauer and Hopkins (2000) constructed Lyapunov functions for the deterministically perturbed dynamics. Hofbauer and Sandholm (2002) combined these with a representation theorem for random utility models and with Pemantle's (1990) nonconvergence theorem to obtain the result formalized here.

Setting

A ppp player game has finite strategy sets Sα={0,…,nα−1}S^\alpha = \{0,\dots,n^\alpha-1\}Sα={0,…,nα−1} and utilities uα:S→Ru^\alpha : S \to \mathbb Ruα:S→R on pure profiles S=∏βSβS = \prod_\beta S^\betaS=∏β​Sβ. The game is a potential game if uα(s)=uβ(s)u^\alpha(s) = u^\beta(s)uα(s)=uβ(s) for all players and all profiles. Mixed profiles form Σ=∏αΔSα\Sigma = \prod_\alpha \Delta S^\alphaΣ=∏α​ΔSα, and player α\alphaα's payoff vector is Uiα(x−α)=∑s: sα=iuα(s)∏β≠αxsββU^\alpha_i(x^{-\alpha}) = \sum_{s:\,s^\alpha=i} u^\alpha(s)\prod_{\beta\ne\alpha}x^\beta_{s^\beta}Uiα​(x−α)=∑s:sα=i​uα(s)∏β=α​xsββ​.

Player α\alphaα's payoffs are perturbed by a random vector εα\varepsilon^\alphaεα with a strictly positive density fαf^\alphafα on Rnα\mathbb R^{n^\alpha}Rnα. The choice function is Ciα(π)=P(arg⁡max⁡jπj+εjα=i)C^\alpha_i(\pi) = P(\arg\max_j \pi_j + \varepsilon^\alpha_j = i)Ciα​(π)=P(argmaxj​πj​+εjα​=i), assumed continuously differentiable, and the perturbed best response is B~α(x−α)=Cα(Uα(x−α))\tilde B^\alpha(x^{-\alpha}) = C^\alpha(U^\alpha(x^{-\alpha}))B~α(x−α)=Cα(Uα(x−α)).

In standard stochastic fictitious play, shocks εtα\varepsilon^\alpha_tεtα​ are independent over time and across players. From an arbitrary initial pure profile, at time t+1t+1t+1 each player plays a maximizer of Ukα(Zt−α)+(εtα)kU^\alpha_k(Z_t^{-\alpha}) + (\varepsilon^\alpha_t)_kUkα​(Zt−α​)+(εtα​)k​, where the beliefs are the time averages

Zt=1t∑u=1tζu.Z_t = \frac1t\sum_{u=1}^t \zeta_u .Zt​=t1​u=1∑t​ζu​.

The mean dynamic of this process is the perturbed best response dynamic

(P)x˙α=B~α(x−α)−xα.(P)\qquad \dot x^\alpha = \tilde B^\alpha(x^{-\alpha}) - x^\alpha .(P)x˙α=B~α(x−α)−xα.

A rest point x∗x^*x∗ of (P) is hyperbolic if every eigenvalue of DF(x∗)DF(x^*)DF(x∗) restricted to the tangent space ∏αR0nα\prod_\alpha \mathbb R^{n^\alpha}_0∏α​R0nα​ of Σ\SigmaΣ has nonzero real part, and linearly stable if every such eigenvalue has negative real part. RP(P)RP(P)RP(P) and LS(P)LS(P)LS(P) denote the rest points and the linearly stable rest points.

By Theorem 2.1 of the paper, Cα(π)=arg⁡max⁡y∈int⁡Δ(y⋅π−Vα(y))C^\alpha(\pi) = \arg\max_{y\in\operatorname{int}\Delta}(y\cdot\pi - V^\alpha(y))Cα(π)=argmaxy∈intΔ​(y⋅π−Vα(y)) for an admissible deterministic perturbation VαV^\alphaVα, so (P) coincides with the deterministically perturbed dynamic (PV), in which the argmax replaces CαC^\alphaCα.

Formalization targets

Goal: Theorem 6.1(iii)

For every potential game, every family of densities meeting the conditions above, every probability space, independent shock family and initial profile:

  1. if the shocks are smooth enough that the VαV^\alphaVα are CNC^NCN, N=∑α(nα−1)N = \sum_\alpha(n^\alpha-1)N=∑α​(nα−1), then
P(ω(Zt) is a connected subset of RP(P))=1;P\big(\omega(Z_t)\text{ is a connected subset of } RP(P)\big) = 1;P(ω(Zt​) is a connected subset of RP(P))=1;
  1. if every rest point of (P) is hyperbolic and the field of (P) is C2C^2C2, then
P(lim⁡t→∞Zt exists and lies in LS(P))=1.P\Big(\lim_{t\to\infty} Z_t \text{ exists and lies in } LS(P)\Big) = 1.P(t→∞lim​Zt​ exists and lies in LS(P))=1.

Milestones

In attack order: Theorem 2.1 (the representation), Proposition 4.1 (the function Π(x)=∑su1(s)∏αxsαα−∑αVα(xα)\Pi(x) = \sum_s u^1(s)\prod_\alpha x^\alpha_{s^\alpha} - \sum_\alpha V^\alpha(x^\alpha)Π(x)=∑s​u1(s)∏α​xsαα​−∑α​Vα(xα) is a strict Lyapunov function for (PV)), the identification of the critical points of Π\PiΠ with the rest points of (PV), Proposition 4.2 (CR(PV)=RP(PV)CR(PV) = RP(PV)CR(PV)=RP(PV) under CNC^NCN smoothness), Proposition 4.3 (under hyperbolicity RP(PV)RP(PV)RP(PV) is finite and equals CR(PV)CR(PV)CR(PV)), and Lemmas A.5 and A.4 (a uniform nondegeneracy condition for the noise of the process).

Significance

The result. Theorem 6.1(iii) says that decentralised, boundedly rational learning in common-interest games does not cycle or wander: beliefs converge to a rest point of the perturbed dynamic, and generically to one that is linearly stable, hence a local maximizer of the perturbed potential Π\PiΠ. Rest points approximate Nash equilibria as the noise vanishes (Proposition 3.1 of the paper), so the theorem is a selection result for equilibria reached by learning. It is also a template for the stochastic-approximation analysis of learning algorithms whose mean dynamic has a Lyapunov function.

Formalizing it. The theorem is proved in the paper, but none of its ingredients is machine-checked: the random utility representation, chain recurrence of flows, Lyapunov arguments for (PV), and the stochastic-approximation step (Benaïm–Hirsch, Benaïm, Pemantle) are all absent from Mathlib and from this platform. A complete development produces a reusable stochastic-approximation layer, not only this theorem.

Difficulty

The obvious argument, "(P) has a strict Lyapunov function, so the process converges to its rest points", fails twice. First, a strict Lyapunov function does not by itself make every chain recurrent point a rest point (the paper cites counterexamples of Akin and of Benaïm); the step needs either Sard's theorem for a CNC^NCN function or finiteness of the rest points, and the stochastic-approximation theory controls the process only through the chain recurrent set. Second, convergence to linearly stable points requires showing that the process avoids unstable rest points. This rests on Pemantle's theorem, whose nondegeneracy hypothesis must be verified uniformly over states and directions (Lemma A.4). Neither step follows from the ODE alone: the theorem is about the random process ZtZ_tZt​.

Formalization scope

Players are Fin p with p ≥ 2, strategies Fin (n α) with n α ≥ 1, and mixed profiles live in the ambient space (α : Fin p) → Fin (n α) → ℝ, on which every vector field is defined. Choice probabilities are probabilities of strict argmax events under volume.withDensity (f α). The process ZtZ_tZt​ is defined pathwise from the shocks, ties broken by the smallest index (a null event), and the theorem quantifies over every probability space and every independent shock family with the given laws. Derivatives of VαV^\alphaVα are those of VαV^\alphaVα composed with the projection onto the plane ∑iyi=1\sum_i y_i = 1∑i​yi​=1. Eigenvalues are the complex roots of the characteristic polynomial of the derivative restricted to the tangent space of Σ\SigmaΣ. Solutions of a dynamic are differentiable curves on [0,∞)[0,\infty)[0,∞) that stay in Σ\SigmaΣ, and chain recurrence uses ε\varepsilonε-chains with times ti≥1t_i \ge 1ti​≥1.

A formalization about the ODE (P) in place of the process ZtZ_tZt​, a fixed noise law such as logit, or convergence to RP(P)RP(P)RP(P) in place of LS(P)LS(P)LS(P) would prove a different and weaker statement. These are excluded.

Needed infrastructure: the random utility representation (mission I of this series), flows and chain recurrence of C1C^1C1 vector fields on compact sets, Sard's theorem for real-valued CNC^NCN functions, and the stochastic-approximation theorems of Benaïm–Hirsch (1999, Thm 3.3), Benaïm (1999, Props. 5.3 and 6.4) and Pemantle (1990, Thm 1). The last three are reusable well beyond this mission, and contributions of any of them are welcome.

Selected references

  • J. Hofbauer and W. H. Sandholm, On the Global Convergence of Stochastic Fictitious Play, Econometrica 70(6), 2265–2294, 2002. https://doi.org/10.1111/1468-0262.00376
  • M. Benaïm and M. W. Hirsch, Mixed Equilibria and Dynamical Systems Arising from Fictitious Play in Perturbed Games, Games and Economic Behavior 29, 36–72, 1999. https://doi.org/10.1006/game.1999.0717
  • M. Benaïm, Dynamics of Stochastic Approximation Algorithms, Séminaire de Probabilités XXXIII, Lecture Notes in Mathematics 1709, 1–68, 1999. https://doi.org/10.1007/BFb0096509
  • R. Pemantle, Nonconvergence to Unstable Points in Urn Models and Stochastic Approximations, Annals of Probability 18(2), 698–712, 1990. https://doi.org/10.1214/aop/1176990853
  • D. Fudenberg and D. M. Kreps, Learning Mixed Equilibria, Games and Economic Behavior 5, 320–367, 1993. https://doi.org/10.1006/game.1993.1021
  • J. Hofbauer and E. Hopkins, Learning in Perturbed Asymmetric Games, Games and Economic Behavior 52, 133–152, 2005. https://doi.org/10.1016/j.geb.2004.06.006
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Operations ResearchTheoretical Computer Science·Captain: mikedeng1

The Design of Competitive Online Algorithms via a Primal-Dual Approach VI: Maximizing Ad-Auctions RevenueTextbook

Motivation

Search-engine ad-auctions sell items (ad slots) to buyers who arrive with per-item bids and a fixed daily budget, online: each item must be allocated the moment it appears, with no ability to revisit past allocations, and no buyer may ever be charged more than its budget. Buchbinder and Naor's survey [1] models this as a generalization of online bipartite matching and derives an allocation algorithm through the same online primal-dual recipe formalized elsewhere in this series (Chapter 4's framework), applied to a genuinely different LP shape — a maximization (revenue) problem whose "packing" role and "covering" role are the reverse of Chapters 4, 5 and 7 — and to a different constraint structure (budget caps on a per-buyer accumulated sum, not a per-constraint 0/1 covering requirement). This mission covers Section 10.1, "The Basic Algorithm": the single-slot allocation algorithm and its (1−1/c)(1−Rmax⁡)(1-1/c)(1-R_{\max})(1−1/c)(1−Rmax​)-competitive analysis (Theorem 10.1). Sections 10.2-10.3 (multiple ad-slots via strong duality; stochastic per-buyer spending guarantees) are out of scope — see Formalization scope.

Setting

Fix a finite set III of buyers, each with budget Bi>0B_i > 0Bi​>0, and a finite set MMM of items; buyer iii bids bij≥0b_{ij} \ge 0bij​≥0 for item jjj, revealed one item at a time in the order enumerated by MMM. Let Rmax⁡:=max⁡i,jbij/BiR_{\max} := \max_{i,j} b_{ij}/B_iRmax​:=maxi,j​bij​/Bi​, carried as an explicit positive parameter. The Allocation algorithm (p. 212), upon each item jjj's arrival, allocates it to the buyer iii maximizing bij(1−xi)b_{ij}(1-x_i)bij​(1−xi​) (where xi∈[0,1]x_i \in [0,1]xi​∈[0,1] is buyer iii's current primal value); if xi≥1x_i \ge 1xi​≥1 already, nothing happens (the buyer is "full"). Otherwise it charges buyer iii the minimum of bijb_{ij}bij​ and its remaining budget, sets the dual allocation variable yij←1y_{ij} \leftarrow 1yij​←1, sets zj←bij(1−xi)z_j \leftarrow b_{ij}(1-x_i)zj​←bij​(1−xi​), and updates xi←xi(1+bij/Bi)+bij/((c−1)Bi)x_i \leftarrow x_i(1+b_{ij}/B_i) + b_{ij}/((c-1)B_i)xi​←xi​(1+bij​/Bi​)+bij​/((c−1)Bi​) for a constant ccc fixed by the analysis. The revenue actually collected from buyer iii is min⁡ ⁣(∑jbijyij, Bi)\min\!\big(\sum_j b_{ij}y_{ij},\,B_i\big)min(∑j​bij​yij​,Bi​) — the buyer is never charged more than its budget. Unlike Chapters 4/7, this LP's dual (the ad-auctions revenue objective, Fig. 10.1) is the maximization problem being solved online; the "primal" covering LP (xix_ixi​, zjz_jzj​ variables) exists only as a duality certificate.

Formalization targets

Theorem 10.1 (the goal, p. 212), given the milestone's dual near-feasibility bound and the fact that each buyer's total accrued bids exceed its budget by at most a factor of Rmax⁡R_{\max}Rmax​ (Claim (3)'s consequence):

∀ (x′′,z′′) feasible for Fig. 10.1’s covering LP,  ∑iactualCharge(i) ≥ (1−1c)(1−Rmax⁡)(∑iBixi′′+∑jzj′′),\forall\, (x'', z'')\text{ feasible for Fig. 10.1's covering LP},\ \ \textstyle\sum_i \mathrm{actualCharge}(i) \ \ge\ (1-\tfrac1c)(1-R_{\max}) \Big(\textstyle\sum_i B_i x''_i + \sum_j z''_j\Big),∀(x′′,z′′) feasible for Fig. 10.1’s covering LP,  ∑i​actualCharge(i) ≥ (1−c1​)(1−Rmax​)(∑i​Bi​xi′′​+∑j​zj′′​),

with c=(1+Rmax⁡)1/Rmax⁡c = (1+R_{\max})^{1/R_{\max}}c=(1+Rmax​)1/Rmax​ taken verbatim from the theorem's own statement — the exact formula, not an O(⋅)O(\cdot)O(⋅) instantiation. Inequality (10.1) (p. 213), the milestone, is the book's own induction-proved lower bound on a buyer's primal value in terms of its accrued bids: xi≥1c−1(c(∑jbijyij)/Bi−1)x_i \ge \frac{1}{c-1}\big(c^{(\sum_j b_{ij}y_{ij})/B_i} - 1\big)xi​≥c−11​(c(∑j​bij​yij​)/Bi​−1).

Significance

Theorem 10.1 is the entry point to a short but influential sub-line of the online primal-dual method — Section 10.2 extends it to multiple ad-slots via strong duality for maximum-weight matching (rather than the weak duality this framework otherwise relies on throughout), and Section 10.3 incorporates stochastic per-buyer spending guarantees, both reusing this section's constant c=(1+Rmax⁡)1/Rmax⁡c=(1+R_{\max})^{1/R_{\max}}c=(1+Rmax​)1/Rmax​ and its limit c→ec\to ec→e as Rmax⁡→0R_{\max}\to0Rmax​→0 (recovering the classic (1−1/e)(1-1/e)(1−1/e)-competitive ratio for the unweighted, unbudgeted case). It is also the first mission in this series to apply the online primal-dual method to a genuine revenue-maximization problem rather than a covering/packing pair with matching roles. No formal development of ad-auctions, budgeted online matching, or this constant was found on the platform as of 2026-09-20 (searches below); this mission is the first.

Difficulty

As with 04-framework's Algorithm 3 and 07-generalized-caching's Fractional Caching algorithm, the central obstacle is characterizing an online process by its own final output. Unlike those two chapters, however, step (3)'s update increment varies per allocation (bd, the specific bid of the item just won), so no closed-form solution of the recurrence exists in general; buyerX is instead defined as an explicit List.foldl realizing the exact per-step update, over the (temporally ordered) list of bids a buyer actually won — a faithful, if less immediately readable, transcription of "the algorithm's output as a function of its own trajectory," in the same spirit as this series' other closed-form definitions. A second difficulty specific to this chapter: the book's derivation of inequality (10.1) is itself an induction on iterations (not a single algebraic step, unlike Eq. (7.2) in 07-generalized-caching), and the theorem's final bound further combines it with a separate "at most one undercharged iteration" argument (Claim (3)'s conclusion, p. 214-215) turning the raw accrued-bid bound into one about the actually collected (budget-capped) revenue — both are stated here as explicit hypotheses (the milestone, and h_at_most_one_undercharge) rather than derived, since the goal is a faithful statement, not a proof; both sorrys are documented, not silently discharged.

Formalization scope

AdAuctionsInstance I M bundles b : I → M → ℝ, B : I → ℝ (hB_pos), and Rmax : ℝ with hRmax_pos : 0 < Rmax and hRmax_bound : ∀ i j, b i j ≤ Rmax * B i — the last two as explicit hypotheses, never derived via Finset.sup, matching 04-framework's d and 07-generalized-caching's k. cParam inst := (1+Rmax)^(1/Rmax) uses Real.rpow (ℝ^ℝ). buyerX inst i bids folds step (3)'s update over a list of won bids; revenue/actualCharge realize ∑jbijyij\sum_j b_{ij}y_{ij}∑j​bij​yij​ and its budget-capped charge. Reals throughout. Explicitly out of scope: Section 10.2's multiple-slot generalization (Theorem 10.2), which requires strong duality for maximum-weight bipartite matching as an explicit premise (the book: "our analysis... crucially relies on strong duality") — a substantially different LP structure (an integral matching LP, not this section's per-buyer budget LP) that this mission's AdAuctionsInstance does not model, and whose applicability of PrimalDualOnline.LP.strong_duality_adapter (this book's own Theorem 2.2) was not verified in the time available. Section 10.3's stochastic guarantee (Theorem 10.3) is likewise out of scope, and its own BRIEF.md-flagged ambiguity (whether its scalar g is min⁡igi\min_i g_imini​gi​ or another aggregate of the per-buyer vector gig_igi​) was not resolved. Both are natural follow-on missions, not attempted here. Welcome contributions: completing the two sorrys, and the Section 10.2-10.3 follow-on mission(s).

Selected references

  • N. Buchbinder, J. Naor. The Design of Competitive Online Algorithms via a Primal-Dual Approach. Foundations and Trends in Theoretical Computer Science, 3(2-3):93-263, 2009. https://doi.org/10.1561/0400000024
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Operations ResearchOptimization·Captain: mikedeng1

Cross-licensing in a Supply Chain with Asymmetric Manufacturers II: Every Innovation Equilibrium Is a Downstream Duopoly, Boundary or InteriorResearch Paper

Motivation

In industries built on a key component sold by one dominant supplier, such as smartphone chipsets, the supplier's contract terms shape how much its downstream customers innovate. Some suppliers require their customers to cross-license their own patents to each other as a condition of buying the component, so that each manufacturer's innovation also improves its rival's product. Wang, Huang and Lee (SSRN 3053682; published in Manufacturing & Service Operations Management, 2023, doi:10.1287/msom.2019.0477) ask when a supplier facing two manufacturers of unequal innovation ability benefits from imposing cross-licensing. Their answer runs through the equilibrium of the manufacturers' innovation game, which is the subject of this mission: Proposition 2 describes how much each manufacturer innovates and shows that the supplier never ends up selling to a single manufacturer.

Setting

A supplier sells a component at wholesale price r≥0r \ge 0r≥0 to manufacturers M1M_1M1​ and M2M_2M2​. Manufacturer MiM_iMi​ chooses a quality improvement Ti≥0T_i \ge 0Ti​≥0 at cost kiTi2k_iT_i^2ki​Ti2​. With cross-licensing of effectiveness β∈[0,1]\beta \in [0, 1]β∈[0,1], the quality improvement of MiM_iMi​ is Ti+βTjT_i + \beta T_jTi​+βTj​ (j≠ij \ne ij=i), and its inverse demand is pi=1+Ti+βTj−qi−qjp_i = 1 + T_i + \beta T_j - q_i - q_jpi​=1+Ti​+βTj​−qi​−qj​. The standing assumptions are

0≤β≤1,49144<k2<k1,0 \le \beta \le 1, \qquad \tfrac{49}{144} < k_2 < k_1,0≤β≤1,14449​<k2​<k1​,

so M2M_2M2​ is the superior manufacturer. The game has three stages.

  1. Quantities. Given (T1,T2)(T_1, T_2)(T1​,T2​) and rrr, each MiM_iMi​ chooses qi≥0q_i \ge 0qi​≥0 to maximize Πi=(1+Ti+βTj−qi−qj−r)qi\Pi_i = (1 + T_i + \beta T_j - q_i - q_j - r)q_iΠi​=(1+Ti​+βTj​−qi​−qj​−r)qi​ (display (1)). The equilibrium quantities, display (2), are a duopoly when rrr is low and a monopoly of the manufacturer with the higher quality when rrr is higher.
  2. Price. The supplier chooses r≥0r \ge 0r≥0 to maximize r(q1+q2)r(q_1 + q_2)r(q1​+q2​). Its price r∗(T1,T2)r^*(T_1, T_2)r∗(T1​,T2​) is the least maximizer. Lemma 1 computes it: the supplier induces a duopoly exactly when β≥3−1\beta \ge \sqrt3 - 1β≥3​−1 or T2≤T^2(T1∣β)T_2 \le \hat T_2(T_1\mid\beta)T2​≤T^2​(T1​∣β), where
T^2(T1∣β)=2−3+T1(1−β(3−1))3−1−β.\hat T_2(T_1\mid\beta) = \frac{2 - \sqrt3 + T_1(1 - \beta(\sqrt3 - 1))}{\sqrt3 - 1 - \beta}.T^2​(T1​∣β)=3​−1−β2−3​+T1​(1−β(3​−1))​.
  1. Innovation. Each MiM_iMi​ chooses Ti≥0T_i \ge 0Ti​≥0 to maximize Πi∗(T1,T2∣β)−kiTi2\Pi^*_i(T_1, T_2\mid\beta) - k_iT_i^2Πi∗​(T1​,T2​∣β)−ki​Ti2​, where Πi∗\Pi^*_iΠi∗​ is its Cournot profit at the supplier's price. An innovation equilibrium is a pure Nash equilibrium of this game.

The proof of Proposition 2 defines two candidate profiles in closed form: the interior candidate TI=(T1I,T2I)T^I = (T^I_1, T^I_2)TI=(T1I​,T2I​), which solves both manufacturers' first-order conditions, and the boundary candidate TB=(T1B,T2B)T^B = (T^B_1, T^B_2)TB=(T1B​,T2B​), where M2M_2M2​ invests exactly up to T^2\hat T_2T^2​. A threshold k^2(k1∣β)\hat k_2(k_1\mid\beta)k^2​(k1​∣β) separates them, and T∗(β)=TBT^*(\beta) = T^BT∗(β)=TB if k2<k^2(k1∣β)k_2 < \hat k_2(k_1\mid\beta)k2​<k^2​(k1​∣β), T∗(β)=TIT^*(\beta) = T^IT∗(β)=TI otherwise.

Formalization targets

Goal: Proposition 2 (p. 12)

Under the standing assumptions:

  1. every innovation equilibrium is a duopoly, meaning both manufacturers sell a positive quantity at the supplier's price;
  2. T∗(β)T^*(\beta)T∗(β) is an innovation equilibrium and a duopoly;
  3. if k2<k^2(k1∣β)k_2 < \hat k_2(k_1\mid\beta)k2​<k^2​(k1​∣β), then β<3−1\beta < \sqrt3 - 1β<3​−1 and M2M_2M2​ is on the boundary:
T2∗=T^2(T1∗∣β);T^*_2 = \hat T_2(T^*_1\mid\beta);T2∗​=T^2​(T1∗​∣β);
  1. if k2≥k^2(k1∣β)k_2 \ge \hat k_2(k_1\mid\beta)k2​≥k^2​(k1​∣β), then T∗(β)=TIT^*(\beta) = T^IT∗(β)=TI and both duopoly first-order conditions hold at T∗(β)T^*(\beta)T∗(β).

Milestones

  • display (2): the Cournot quantities are the unique equilibrium of the quantity game;
  • Lemma 1: the supplier's price, the regime, its optimal profit, and the gross profits Π1∗,Π2∗\Pi^*_1, \Pi^*_2Π1∗​,Π2∗​;
  • monopoly infeasibility at T1=0T_1 = 0T1​=0, from the proof (p. A.1): M2M_2M2​'s monopoly optimum 1/(16k2−1)1/(16k_2 - 1)1/(16k2​−1) lies below T^2(0∣β)\hat T_2(0\mid\beta)T^2​(0∣β);
  • TIT^ITI is the unique solution of the two first-order conditions (p. A.1);
  • T2B=T^2(T1B∣β)T^B_2 = \hat T_2(T^B_1\mid\beta)T2B​=T^2​(T1B​∣β), and T1BT^B_1T1B​ is M1M_1M1​'s best response to T2BT^B_2T2B​ (p. A.1);
  • k^2\hat k_2k^2​ is where T2I=T2BT^I_2 = T^B_2T2I​=T2B​, and above it TIT^ITI lies in the duopoly region (p. A.2);
  • k^2(k1∣β)\hat k_2(k_1\mid\beta)k^2​(k1​∣β) is strictly decreasing in β\betaβ with k^2(k1∣1)=0\hat k_2(k_1\mid 1) = 0k^2​(k1​∣1)=0 (p. A.2), so the boundary region shrinks to empty as β\betaβ grows.

Significance

Proposition 2 is the paper's equilibrium characterization. Proposition 3 is its instance β=0\beta = 0β=0 (no cross-licensing), and Proposition 4 compares the supplier's equilibrium profits with and without cross-licensing on the closed forms TBT^BTB, TIT^ITI and k^2\hat k_2k^2​ established here. The economic content is that, under cross-licensing, the supplier always ends up selling to both manufacturers. When the superior manufacturer's cost advantage is large it caps its own innovation exactly where the supplier stops preferring a monopoly.

The paper's proof states the closed forms and asserts the checks ("one can obtain", "we verify"). This mission produces a machine-checked version: a complete definition of the three-stage game, with the supplier's price defined as an optimization rather than by its solution, and the equilibrium claims stated against that game. To our knowledge no part of this result has been formalized before.

Difficulty

The innovation payoff of the superior manufacturer is discontinuous. When T2T_2T2​ moves just above T^2(T1∣β)\hat T_2(T_1\mid\beta)T^2​(T1​∣β), the supplier switches from a duopoly price to a monopoly price, and M2M_2M2​'s gross profit jumps down. A first-order argument therefore does not show that T∗T^*T∗ is an equilibrium. One must also show that M2M_2M2​ never gains by moving into the monopoly region, and that M1M_1M1​ never gains by deviating above T2T_2T2​, where M1M_1M1​ itself becomes the potential monopolist. The boundary candidate is an equilibrium only because the supplier breaks its indifference at the boundary toward the duopoly.

Part 1 quantifies over every equilibrium, not only T∗T^*T∗. The paper checks monopoly infeasibility only at T1=0T_1 = 0T1​=0, so the general case needs its own argument. The equilibrium is not unique: for some parameters a mirrored profile with M1M_1M1​ at its own boundary is also an equilibrium. Uniqueness is therefore not claimed. The remaining steps are polynomial and rational inequalities in (k1,k2,β)(k_1, k_2, \beta)(k1​,k2​,β) involving 3\sqrt33​.

Formalization scope

  • Parameters β,k1,k2\beta, k_1, k_2β,k1​,k2​ are real numbers. The standing assumptions 0≤β≤10 \le \beta \le 10≤β≤1 and 49/144<k2<k149/144 < k_2 < k_149/144<k2​<k1​ are bundled as Standing β k1 k2.
  • Quantities and innovation levels range over R≥0\mathbb R_{\ge 0}R≥0​ (NNReal). Equilibria use the published two-player predicate CompetingChains.Cournot.IsPureNash.
  • Wholesale prices range over [0,∞)[0, \infty)[0,∞). The paper leaves this implicit, so it is a disclosed addition.
  • Display (2) is encoded in symmetric form, with the manufacturer of larger quality as the possible monopolist. The paper prints it for T2≥T1T_2 \ge T_1T2​≥T1​, but deviations in the innovation game reach T1>T2T_1 > T_2T1​>T2​.
  • The supplier's price is the least maximizer of r(q1+q2)r(q_1 + q_2)r(q1​+q2​) over r≥0r \ge 0r≥0. This is the tie-break Lemma 1 uses at T2=T^2T_2 = \hat T_2T2​=T^2​.
  • First-order conditions are stated as derivatives (HasDerivAt … 0) of Lemma 1's duopoly polynomials, because the game payoff is not differentiable at the boundary.
  • All closed forms are transcribed as printed, with 3\sqrt33​ as Real.sqrt 3. Every denominator is proved nonzero in its regime, never assumed.

Two trivializing formalizations are ruled out. Equilibria are never defined by first-order conditions or by the closed forms, and the supplier's price is never defined by Lemma 1's case rule. Both are theorems here.

The source is the authors' SSRN manuscript (abstract 3053682, version of 2023-04-27); its proofs are in the appendix, pp. A.1–A.9. The paper's equivalent threshold β^(k1,k2)\hat\beta(k_1, k_2)β^​(k1​,k2​) is not formalized. Proofs of any milestone are welcome. Lemma 1 and display (2) are self-contained, and the closed-form milestones need only real-algebraic inequalities with 3\sqrt33​.

Selected references

  • J. Wang, T. Huang, H. Lee, Cross-licensing in a Supply Chain with Asymmetric Manufacturers, SSRN 3053682, version of 2023-04-27. https://ssrn.com/abstract=3053682
  • J. Wang, T. Huang, H. Lee, Cross-licensing in a Supply Chain with Asymmetric Manufacturers, Manufacturing & Service Operations Management, 2023. https://doi.org/10.1287/msom.2019.0477
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EconomicsOperations ResearchOptimization·Captain: mikedeng1

Improving Access to Rare Disease Treatments: Subsidy, Pricing, and Payment Schemes II: Consortium Price, No Cure No Pay: Subsidize Only Patients When the Price Is High, Only the Manufacturer When LowResearch Paper

Motivation

A rare disease affects few patients, so a drug for it has a small market and its research and development (R&D) cost is spread over few sales. Governments respond with two kinds of subsidy: cost subsidies that pay part of the manufacturer's R&D bill (orphan drug programmes), and price subsidies that pay part of what each patient is charged. At the same time two practices change how drugs are priced and paid for. In some markets an independent consortium negotiates the price instead of the manufacturer, and some manufacturers offer outcome-based payment ("No Cure No Pay", as in a programme of Bristol-Myers Squibb), under which the patient pays only if the drug works.

W. Olsder, T. Martagan and C. S. Tang ask how a government with a fixed budget should divide it between the manufacturer and the patients under each pricing and payment regime. This mission formalizes their analysis of the regime with a consortium price and outcome-based payment, Setting (2B) of the paper, where the answer depends on the price: for a high price only patients should be subsidized, and for a low price only the manufacturer. The source is the SSRN working paper 3481150 (version of 2019-11-13); the article later appeared in Management Science (2023) with possibly different numbering, which is not used here.

Setting

The market has size one. A patient's valuation VVV of an efficacious drug is uniform on [0,1][0,1][0,1]. The model has three positive primitives: the R&D cost scale kkk, the government's budget BBB, and the unit price ppp, which the consortium fixes and which lies in (0,1)(0,1)(0,1).

  • A subsidy policy is a pair (α,β)(\alpha,\beta)(α,β) with α∈[0,1)\alpha\in[0,1)α∈[0,1) and β∈[0,1)\beta\in[0,1)β∈[0,1). The government pays the share α\alphaα of the R&D cost and the share β\betaβ of the unit price.
  • The manufacturer chooses a target efficacy e>0e>0e>0, the probability that the drug works, at R&D cost ke2ke^2ke2. Under outcome-based payment it is paid ppp per patient only when the drug works, and the demand is 1−(1−β)p1-(1-\beta)p1−(1−β)p. Its profit, the bracket of the paper's (9), is
πm(e)=e p [1−(1−β)p]−(1−α)ke2.\pi_m(e)=e\,p\,[1-(1-\beta)p]-(1-\alpha)ke^2 .πm​(e)=ep[1−(1−β)p]−(1−α)ke2.

A best response to (α,β)(\alpha,\beta)(α,β) is a maximizer of πm\pi_mπm​ over e>0e>0e>0.

  • At efficacy eee the patient welfare (7) and the government spending, the left-hand side of the budget constraint in (10), are
W=12 e (1−(1−β)p)2,M=αke2+e βp [1−(1−β)p].W=\tfrac12\,e\,(1-(1-\beta)p)^2,\qquad M=\alpha k e^2+e\,\beta p\,[1-(1-\beta)p].W=21​e(1−(1−β)p)2,M=αke2+eβp[1−(1−β)p].
  • A policy is optimal when it has a best response at which M≤BM\le BM≤B and its welfare there is at least the welfare of every other policy at each of that policy's best responses with M≤BM\le BM≤B.
  • αmax⁡\alpha_{\max}αmax​ is the largest α∈[0,1)\alpha\in[0,1)α∈[0,1) for which the policy (α,0)(\alpha,0)(α,0) is affordable at the manufacturer's best response.

The Lean development names these objects IsPolicy, profit, BR, welfare, spend, IsOptimal and IsAlphaMax, in the namespace RareDisease.ExogOutcome.

Formalization targets

Goal: Proposition 3, parts 1 and 3

For k>0k>0k>0, B>0B>0B>0, 0<p<10<p<10<p<1 and αmax⁡\alpha_{\max}αmax​ as above:

  1. At every optimal policy the budget constraint binds: M=BM=BM=B at the best response.
  2. If
p ≥ 25−αmax⁡andB<p22k,p\ \ge\ \frac{2}{5-\alpha_{\max}}\quad\text{and}\quad B<\frac{p^2}{2k},p ≥ 5−αmax​2​andB<2kp2​,

then there is a β1\beta_1β1​ such that (0,β1)(0,\beta_1)(0,β1​) is optimal and every optimal policy equals (0,β1)(0,\beta_1)(0,β1​). Only patients are subsidized. 3. If

p ≤ 2(1−αmax⁡)5,p\ \le\ \frac{2(1-\alpha_{\max})}{5},p ≤ 52(1−αmax​)​,

then (αmax⁡,0)(\alpha_{\max},0)(αmax​,0) is optimal, every optimal policy equals it, and

αmax⁡=8Bk+p4−2p3+p2−(p−p2)16Bk+p4−2p3+p28Bk.\alpha_{\max}=\frac{8Bk+p^4-2p^3+p^2-(p-p^2)\sqrt{16Bk+p^4-2p^3+p^2}}{8Bk}.αmax​=8Bk8Bk+p4−2p3+p2−(p−p2)16Bk+p4−2p3+p2​​.

Only the manufacturer is subsidized.

The thresholds are the printed ones. They are not the sharpest possible (see Formalization scope), but they are what the paper states.

Milestones

In attack order: the best response (19), e∗=p(1−(1−β)p)/(2(1−α)k)e^*=p(1-(1-\beta)p)/(2(1-\alpha)k)e∗=p(1−(1−β)p)/(2(1−α)k); the reduced problem (20), giving welfare and spending at the best response; the fact that both expressions of (20) are increasing in α\alphaα and in β\betaβ; and the marginal-rate identity from the proof of Proposition 3 (Appendix C, p. 37), whose sign is that of (5−α)p−2(1−α)(5-\alpha)p-2(1-\alpha)(5−α)p−2(1−α).

Significance

The result splits the decision between subsidizing patients and subsidizing the manufacturer by a single comparison of the consortium's price with thresholds that depend only on the budget and the cost scale. For a policy maker the consequence is concrete. A high negotiated price already gives the manufacturer enough incentive to develop an efficacious drug, so every unit of budget should lower what patients pay. A low price leaves the manufacturer short of incentive, so every unit should go to R&D. Splitting the budget is never optimal in either regime.

The formalization adds three things. First, it checks a statement whose printed form has errors. Part 2 of the proposition, "subsidize both" for intermediate prices, is false as printed: B=0.05B=0.05B=0.05, k=0.3k=0.3k=0.3, p=0.2p=0.2p=0.2 lies in the printed middle range, yet the unique optimum is manufacturer-only. The printed closed form for the patient subsidy in part 1 does not satisfy the binding budget constraint. Second, the proof in the paper is a marginal argument along the binding curve, and its extremal step takes a maximum over α\alphaα at the wrong end; the parts posed here stay true because their thresholds are stronger than needed, which a machine-checked proof makes explicit. Third, the game is stated as a game: the government's problem is posed over the manufacturer's best-response set, not over the reduced formulas, so the reduction (19)–(20) is itself a theorem. None of these results has a machine-checked proof yet.

Difficulty

The reduced problem (20) is a two-variable optimization with a nonlinear constraint, and its feasible region has no simple shape. The obvious first idea is to solve the first-order conditions of the Lagrangian, but the optimum of parts 1 and 3 is on the boundary of the policy square (α=0\alpha=0α=0 or β=0\beta=0β=0), so stationarity says nothing there. What has to be shown instead is a global sign property along the whole binding curve: trading manufacturer subsidy for patient subsidy changes welfare per unit of spending with the sign of (5−α)p−2(1−α)(5-\alpha)p-2(1-\alpha)(5−α)p−2(1−α), and this sign must be controlled for every α\alphaα the curve passes through. That requires knowing that the curve stays in α≤αmax⁡\alpha\le\alpha_{\max}α≤αmax​, which comes from the monotonicity of spending. Two existence and uniqueness questions also arise. In part 1 a patient-only policy must exhaust the budget with β<1\beta<1β<1, which is where B<p2/(2k)B<p^2/(2k)B<p2/(2k) enters. In both parts no other policy may tie the optimum.

Formalization scope

All quantities are real numbers. The standing assumptions k>0k>0k>0, B>0B>0B>0 and 0<p<10<p<10<p<1 are hypotheses of every theorem. The paper uses them without stating them: with p≥1p\ge1p≥1 and β=0\beta=0β=0 the demand 1−p1-p1−p is not positive and the manufacturer has no best response with e>0e>0e>0; the closed form of αmax⁡\alpha_{\max}αmax​ divides by 8Bk8Bk8Bk. As in the paper, the efficacy eee ranges over all positive reals and is not bounded by 111. Policies satisfy α,β∈[0,1)\alpha,\beta\in[0,1)α,β∈[0,1), a half-open interval.

The added hypothesis B<p2/(2k)B<p^2/(2k)B<p2/(2k) in part 1 is necessary. With α=0\alpha=0α=0 the spending tends to p2/(2k)p^2/(2k)p2/(2k) as β↑1\beta\uparrow1β↑1, so for larger budgets no patient-only policy exhausts the budget. The thresholds 2/(5−αmax⁡)2/(5-\alpha_{\max})2/(5−αmax​) and 2(1−αmax⁡)/52(1-\alpha_{\max})/52(1−αmax​)/5 are posed as printed; replacing them by the sharper values 2/52/52/5 and 2(1−αmax⁡)/(5−αmax⁡)2(1-\alpha_{\max})/(5-\alpha_{\max})2(1−αmax​)/(5−αmax​) would be a different theorem. Part 2 and the printed closed form of part 1 are not posed, because both are false as printed.

The formalization cannot be trivialized by defining the government's problem through the reduced forms (20), because welfare and spending in IsOptimal are evaluated at members of the best-response set BR. "Optimal" means attained and compared against every policy at every best response, not a supremum. αmax⁡\alpha_{\max}αmax​ is defined as the greatest affordable manufacturer-only subsidy, not by its closed form, which is part of the goal.

A complete development needs only real analysis from Mathlib: maximization of a concave quadratic, monotonicity of rational functions, one-variable derivatives for the marginal-rate milestone, and Real.sqrt for the closed form. Proofs of any milestone are welcome.

Selected references

  • W. Olsder, T. Martagan, C. S. Tang, Improving Access to Rare Disease Treatments: Optimal Subsidies, Pricing, and Payment, SSRN working paper 3481150, version of 2019-11-13. https://ssrn.com/abstract=3481150
  • W. Olsder, T. Martagan, C. S. Tang, Improving Access to Rare Disease Treatments: Subsidy, Pricing, and Payment Schemes, Management Science, 2023. https://doi.org/10.1287/mnsc.2022.4634
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EconomicsOperations ResearchOptimization·Captain: mikedeng1

Quantum Economic Advantage: A Quantum Computing Firm Can Out-Invest a Cheaper-to-Scale Classical Rival in Subgame-Perfect EquilibriumResearch Paper

Why investment can reverse a cost advantage

Quantum algorithms can reduce the work needed for some computations, but a provider also has to build hardware capable of serving a market. Bova, Goldfarb, and Melko model these two costs separately in Quantum Economic Advantage. Their question is whether a quantum provider can choose more market-creating investment than a classical rival even when building that additional quantum capacity is more expensive. The answer matters to their economic comparison: a lower variable cost does not, by itself, order the firms' investment decisions.

The working paper was circulated as NBER Working Paper No. 29724 in February 2022 and appeared in Management Science in 2023. This mission cites the NBER version throughout. It addresses the paper's Proposition 2, its explicit numerical witness, and the model results used around that proposition. The paper proves these results analytically; the remaining task here is a machine-checked formalization of their statements and proofs.

The two-stage duopoly

There are two firms. Firm 1 supplies quantum computing and has constant unit cost ccc; firm 2 supplies classical computing and has unit cost c2c^2c2. A common demand intercept aaa measures the initial market size. The paper assumes a>c2>c>1a>c^2>c>1a>c2>c>1. The firms sell differentiated computing services, with substitution parameter γ∈[0,1]\gamma\in[0,1]γ∈[0,1]: at γ=0\gamma=0γ=0 their products do not compete through demand, while at γ=1\gamma=1γ=1 they are identical in the model. This is an economic representation of quantum advantage, rather than a formal model of a quantum algorithm. See §2 of the working paper.

In stage 1, firms simultaneously choose investments x1,x2≥0x_1,x_2\ge0x1​,x2​≥0. Firm iii pays Bixi2/2B_i x_i^2/2Bi​xi2​/2, where Bi>0B_i>0Bi​>0, and its investment raises its own demand intercept to a+xia+x_ia+xi​. In stage 2, after observing both investments, firms simultaneously choose quantities q1,q2≥0q_1,q_2\ge0q1​,q2​≥0. Their inverse-demand prices and profits are

p1=a+x1−q1−γq2,p2=a+x2−q2−γq1,p_1=a+x_1-q_1-\gamma q_2,\qquad p_2=a+x_2-q_2-\gamma q_1,p1​=a+x1​−q1​−γq2​,p2​=a+x2​−q2​−γq1​, π1=q1p1−cq1−B1x122,π2=q2p2−c2q2−B2x222.\pi_1=q_1p_1-cq_1-\frac{B_1x_1^2}{2},\qquad \pi_2=q_2p_2-c^2q_2-\frac{B_2x_2^2}{2}.π1​=q1​p1​−cq1​−2B1​x12​​,π2​=q2​p2​−c2q2​−2B2​x22​​.

A subgame-perfect equilibrium consists of an investment pair and a quantity strategy assigning a Cournot Nash equilibrium to every feasible investment pair, including pairs reached after a unilateral deviation. At the chosen investments, neither firm can improve its profit by changing its own investment, anticipating the stage-2 strategy. The stage-2 payoff excludes investment cost because that cost is already sunk when quantities are chosen.

Formalization targets

Proposition 2: investment reversal

The goal is the paper's existence claim, over the game itself:

∃ (a,c,γ,B1,B2) satisfying the model and Lemma 1 conditions,B2<B1,∃ an SPE,∀ SPEs,  x2<x1.\exists\,(a,c,\gamma,B_1,B_2)\text{ satisfying the model and Lemma 1 conditions},\quad B_2<B_1,\quad \exists\,\text{an SPE},\quad \forall\,\text{SPEs},\;x_2<x_1.∃(a,c,γ,B1​,B2​) satisfying the model and Lemma 1 conditions,B2​<B1​,∃an SPE,∀SPEs,x2​<x1​.

The classical firm's cost coefficient is smaller, yet the quantum firm invests more. The proof gives a=20a=20a=20, c=2c=2c=2, γ=1\gamma=1γ=1, B1=10B_1=10B1​=10, B2=8B_2=8B2​=8; its investments are x1∗=102/109x_1^*=102/109x1∗​=102/109 and x2∗=89/109x_2^*=89/109x2∗​=89/109. The goal concerns the actual two-stage equilibrium, so the closed forms are supporting milestones rather than the definition of success. The paper's Proposition 2 and its proof appear on PDF pages 14 and 27–28.

Supporting results

Equations (3)–(4) give the interior Cournot quantities; (14)–(15) give the second derivatives of reduced profit; Lemma 1 gives sufficient parameter thresholds for positive investments and concavity; and (5)–(6) give equilibrium investments. Section 7 derives an exact threshold for the inequality x1∗>x2∗x_1^*>x_2^*x1∗​>x2∗​ and evaluates it at the numerical witness. Additional milestones record the displayed optimal profits, Proposition 1 on positive quantum profit, the no-investment comparative static of (11)–(12), and Corollary 1's monopoly case. These targets follow the working paper's equations and proofs.

What the result establishes

The result separates a firm's marginal cost of supplying computations from its cost of expanding the market. In this model, the quantum firm can justify a larger investment even with a larger coefficient on investment cost. The exact threshold identifies which combination of demand, variable cost, competition, and investment costs creates that ordering. Proposition 1 and the comparative static make related claims about profitability and the value of additional market size.

A complete formalization would connect the printed algebraic formulas to best responses over nonnegative actions, including possible corner outcomes after off-path investments. The reusable component is the published linear differentiated Cournot game; this mission adds the investment stage and source-specific parameters. The working paper supplies proofs on paper, while the Lean theorem files here are open statements awaiting machine-checked proofs.

Where the argument is delicate

Equations (3)–(4) solve interior first-order conditions, but stage-2 deviations can drive one firm's quantity to zero. A proof about a genuine subgame-perfect equilibrium must handle those corners throughout the strategy, not only at the final investment pair. Likewise, the second derivatives of the algebraic interior profit do not automatically settle every stage-1 deviation in the constrained game. The mission's equilibrium milestone must bridge those two readings. Lemma 1's thresholds also contain quotients whose denominators require checking under the stated parameter conditions.

Formalization scope and conventions

All parameters, investments, quantities, profits, and thresholds are real. The formalization requires xi,qi≥0x_i,q_i\ge0xi​,qi​≥0 in the equilibrium predicates. Standing records 0≤γ≤10\le\gamma\le10≤γ≤1, a>c2>c>1a>c^2>c>1a>c2>c>1, and positive BiB_iBi​. Lemma1Cond records the strict thresholds at the end of the proof of Lemma 1, with the paper's Max⁡\operatorname{Max}Max represented by real max. Firm 1 is quantum throughout; firm 2's unit cost is defined as c2c^2c2, not an independent parameter. The closed-form quantities and investments are used in milestones; the main goal quantifies over the subgame-perfect equilibrium predicate.

Several printed or implicit conventions affect the statements. Lemma 1 is phrased loosely on PDF page 11; its proof's exact sufficient conditions on page 26 are the milestone. The proof's strict claims about differences of thresholds become equalities when γ=0\gamma=0γ=0, without changing the final sufficient condition. Corollary 1 uses a different regime, a<c2a<c^2a<c2, and is stated without the main model's Standing condition; c<ac<ac<a ensures the asserted quantum monopoly has positive output. The comparative static concerns the separate model with x1=x2=0x_1=x_2=0x1​=x2​=0. A printed reference to optimal profits in “(11)” in the proof of Proposition 1 points to the unnumbered optimal-profit display on PDF page 12. The repeated x1∗x_1^*x1∗​ in the proof of Proposition 2 is read as x1∗,x2∗x_1^*,x_2^*x1∗​,x2∗​.

Useful contributions include proofs about nonnegative Cournot best responses and their uniqueness, the boundary behavior of stage-1 reduced profits, the exact sign conditions on the paper's denominators, and proofs of the source-indexed statements. The definition layer is meant to be shared by all results in this one paper.

Selected references

  • Francesco Bova, Avi Goldfarb, and Roger G. Melko, Quantum Economic Advantage, NBER Working Paper No. 29724, 2022. Working paper.
  • Francesco Bova, Avi Goldfarb, and Roger G. Melko, Quantum Economic Advantage, Management Science, 2023. DOI: 10.1287/mnsc.2022.4578. The mission's theorem numbering follows the NBER version above.
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EconomicsOperations ResearchOptimization·Captain: mikedeng1

Personalized Pricing and Distribution Strategies II: With Personalized Pricing by the Manufacturer, Dual Distribution Is Optimal Iff β > β_PZ(α), and β_PU(α) > β_PP(α)Research Paper

Motivation

A manufacturer can sell directly to consumers and also supply an independent retailer. The retailer reaches consumers for whom its distribution service is more valuable, but its presence can also force the manufacturer to lower direct-channel prices. Jullien, Reisinger and Rey study when the additional sales justify dual distribution under different abilities to personalize retail prices (Jullien, Reisinger and Rey, 2023). This mission isolates their Proposition 4: the manufacturer can personalize its own prices, and the retailer may either personalize or charge one uniform price. The source used here is the authors' March 2022 manuscript; the formal claims follow its Proposition 4 and Online Appendix A.

The question matters for vertical channel design because a retailer's reach and the competition it creates pull industry profit in different directions. The manufacturer and retailer negotiate a wholesale contract before retail pricing. A fixed fee can divide their combined profit, so the distribution decision depends on whether both channels together earn more than the manufacturer's direct channel alone. The model makes that comparison exact for a continuum of consumers rather than treating the retailer's contribution as a general benefit (Jullien, Reisinger and Rey, 2023).

Setting

Consumers have types x∈[0,X]x\in[0,X]x∈[0,X], with one unit of consumer mass per unit of xxx. A monopoly manufacturer A offers a direct channel, and retailer B offers a differentiated service. Their consumer values are uA(x)=max⁡{1−x,0}u_A(x)=\max\{1-x,0\}uA​(x)=max{1−x,0} and uB(x)=max⁡{v−sx,0}u_B(x)=\max\{v-sx,0\}uB​(x)=max{v−sx,0}. The market parameters satisfy 0<s<v<10<s<v<10<s<v<1 and X≥v/sX\ge v/sX≥v/s. Thus both valuations fall as the consumer index rises, B's valuation falls more slowly, and the market extends beyond the last consumer with positive value for B. The two values cross at x^=(1−v)/(1−s)\hat x=(1-v)/(1-s)x^=(1−v)/(1−s), with common value u^=(v−s)/(1−s)\hat u=(v-s)/(1-s)u^=(v−s)/(1−s).

The channel contributions measure valuation advantages. A's contribution is α=∫0x^(uA(x)−uB(x)) dx\alpha=\int_0^{\hat x}(u_A(x)-u_B(x))\,dxα=∫0x^​(uA​(x)−uB​(x))dx; B's is β=∫x^X(uB(x)−uA(x)) dx\beta=\int_{\hat x}^{X}(u_B(x)-u_A(x))\,dxβ=∫x^X​(uB​(x)−uA​(x))dx. They are defined by the integrals. The closed forms in the Online Appendix, α=(1−v)2/[2(1−s)]\alpha=(1-v)^2/[2(1-s)]α=(1−v)2/[2(1−s)] and β=(v−s)2/[2s(1−s)]\beta=(v-s)^2/[2s(1-s)]β=(v−s)2/[2s(1−s)], are milestone results, not substitutions into the definitions.

The manufacturer can instead use mono distribution, selling only through A and charging each consumer the full direct-channel value. Its profit is ΠPm=∫0XuA(x) dx=1/2\Pi_P^m=\int_0^X u_A(x)\,dx=1/2ΠPm​=∫0X​uA​(x)dx=1/2. Under dual distribution, a two-part tariff has wholesale price w≥0w\ge0w≥0 and a fixed fee. The fee allocates the proceeds between firms; industry profit is the total price paid by consumers. Dual distribution is selected only when its industry profit strictly exceeds ΠPm\Pi_P^mΠPm​, as specified in the manuscript's footnote 17.

Two retail continuations are relevant. In PP, both firms personalize prices, and the manuscript selects the Bertrand equilibrium where the lower-valued offering prices at its opportunity cost. In PU, B first announces one price pBp_BpB​, and A then tailors its prices to consumer types. B chooses a globally profit-maximizing price after allowing for A's response. These rules determine each consumer's payment and hence industry profit; they are represented directly in the Lean definitions.

Formalization targets

The central target is Proposition 4. It asserts the existence of functions βPP\beta_{PP}βPP​ and βPU\beta_{PU}βPU​ of α\alphaα alone, valid uniformly across all admissible (v,s,X)(v,s,X)(v,s,X), with

dual distribution in PP  ⟺  β>βPP(α),dual distribution in PU  ⟺  β>βPU(α),βPP(α)<βPU(α).\text{dual distribution in PP}\iff\beta>\beta_{PP}(\alpha),\qquad \text{dual distribution in PU}\iff\beta>\beta_{PU}(\alpha),\qquad \beta_{PP}(\alpha)<\beta_{PU}(\alpha).dual distribution in PP⟺β>βPP​(α),dual distribution in PU⟺β>βPU​(α),βPP​(α)<βPU​(α).

The valuation-space milestones identify the underlying cutoffs v~(s)=s(2+1−s)/(1+s)\tilde v(s)=s(2+\sqrt{1-s})/(1+s)v~(s)=s(2+1−s​)/(1+s) in PP and vˇ(s)=s[2+(1−s)(2+5s+s2)/(1+2s)]/(1+s)\check v(s)=s[2+\sqrt{(1-s)(2+5s+s^2)/(1+2s)}]/(1+s)vˇ(s)=s[2+(1−s)(2+5s+s2)/(1+2s)​]/(1+s) in PU. They say dual distribution is strictly better exactly when vvv exceeds the respective cutoff. Other milestones give the mono benchmark, the formulas for α\alphaα and β\betaβ, the existence of the two contribution thresholds, and the strict ordering v~(s)<vˇ(s)\tilde v(s)<\check v(s)v~(s)<vˇ(s) (Jullien, Reisinger and Rey, 2023, Proposition 4 and Online Appendix A).

Significance

Proposition 4 turns a distribution choice involving wholesale and retail prices into a comparison of two channel contributions. It identifies precisely how large B's contribution must be to make a second channel profitable, and it says that B's ability to personalize prices lowers that required contribution. A price policy restriction on B therefore changes the region of market parameters in which the retailer is brought into the channel. The strict threshold statement also distinguishes an actual gain from a tie with mono distribution.

The result is proved in the authors' manuscript, with detailed arguments in Online Appendix A. This mission asks for a machine-checked version of the market definitions, its integral and cutoff identities, and the passage from (v,s)(v,s)(v,s) to (α,β)(\alpha,\beta)(α,β). The proposed Lean theorem files contain open proof obligations; compilation of their statements does not supply those proofs. A completed development would give reusable formal definitions of the consumer outcomes and a checked statement of the channel comparison.

Difficulty

The industry profit changes formula as the wholesale price changes which consumers can be served by B. In PP, the profit derivative has different expressions on either side of w=v−sw=v-sw=v−s, and the curvature of one region changes with sss. In PU, B's uniform price can leave some consumers buying directly from A both before and after B's customer interval. A single interior first-order calculation therefore does not settle the global distribution choice. The contribution thresholds add another step: each cutoff in (v,s)(v,s)(v,s) must correspond to a threshold depending only on α\alphaα, and the two resulting thresholds must retain a strict order along every admissible iso-α\alphaα curve (Jullien, Reisinger and Rey, 2023, Online Appendix A).

Formalization scope

Lean uses real numbers for v,s,X,w,pBv,s,X,w,p_Bv,s,X,w,pB​, interval integrals against Lebesgue measure for profits and contributions, and the Lebesgue volume of B's buyer set for its PU demand. The standing assumptions are exactly 0<s<v<10<s<v<10<s<v<1 and v/s≤Xv/s\le Xv/s≤X. Retail prices in B's maximization range over all real numbers; wholesale prices satisfy w≥0w\ge0w≥0. The continuation fixes an assignment of indifferent consumers. Positive-valuation tie boundaries have measure zero; at w=0w=0w=0, an interval of zero-valuation consumers pays zero in PP. Consumers with uB(x)=0u_B(x)=0uB​(x)=0 are assigned to A in PU and are excluded from B's demand. If several uniform prices maximize B's profit, a strict industry gain at one maximizing price suffices in the dual-distribution predicate.

The setting defines industry profits from consumer payments and defines dual distribution by a strict profit comparison. It never defines them from v~\tilde vv~, vˇ\check vvˇ, or the desired threshold functions. The real-valued integrals are well behaved here because the consumer interval is bounded and the integrands are piecewise affine. The cutoff expressions use positive denominators under the standing assumptions. The PU price maximum is global; neither a stationary point nor the first market configuration is built into the definition.

A complete proof needs interval integration of piecewise affine functions, global optimization across the PP and PU price regions, and a comparison of the induced contribution-space thresholds. The integration and market-outcome lemmas can be reused for related channel games. Contributions establishing the stated milestones, or reusable lemmas about these bounded price regions, fit the mission's scope.

Selected references

  • Bruno Jullien, Markus Reisinger and Patrick Rey, Personalized Pricing and Distribution Strategies, Management Science, 2023. DOI 10.1287/mnsc.2022.4437. Formalization source: authors' manuscript of March 2022, PDF SHA-256 25a6c84ac0c48c6720f6a9e1f9b1f1ec516412c31dac044ac84c1d4c72dfc253, Proposition 4 and Online Appendix A.
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EconomicsMechanism DesignOperations Research·Captain: mikedeng1

The Voice of Customers in Customization II: Under O-Learning, the Cheap-Signaling Separating Equilibrium Exists If and Only If θH/θL ≥ ΛResearch Paper

Motivation

Firms that customize products, especially in business-to-business and service markets, need to learn what each customer wants before designing for that customer. Liang Guo's paper The Voice of Customers in Customization (SSRN 3994319; published in Management Science, DOI 10.1287/mnsc.2021.04025) compares two ways a seller can learn a customer's preference. Under A-Learning the customer describes its preference and the seller designs the product. Under O-Learning the customer proposes the design itself and the seller decides whether to accept it. The customer's preference is private, and the price is bargained after the product has been made, so a customer has a reason to misrepresent itself in either case: a customer believed to value quality less is charged less.

This mission formalizes the paper's characterization of when O-Learning reveals preferences without distortion: each customer type requests exactly the design it would request if its preference were public. The paper calls this the cheap-signaling equilibrium. A companion mission in this series formalizes the analogous result for A-Learning (Proposition 1), and another shows that O-Learning has no separating equilibrium at all below the threshold found here.

Setting

A seller faces buyers whose quality preference is θ∈{θH,θL}\theta\in\{\theta_H,\theta_L\}θ∈{θH​,θL​} with θH>θL>0\theta_H>\theta_L>0θH​>θL​>0. Each buyer knows its own θ\thetaθ. The seller holds the prior that a fraction α∈(0,1)\alpha\in(0,1)α∈(0,1) of buyers has θH\theta_HθH​. A product has a quality q≥0q\ge 0q≥0. Producing it costs kq2kq^2kq2 and selling it costs sq2sq^2sq2, with k,s>0k,s>0k,s>0. The selling cost is incurred before the price is set. In the price stage either party makes a take-it-or-leave-it offer: the seller with probability γ∈(0,1)\gamma\in(0,1)γ∈(0,1), charging θ^q\hat\theta qθ^q where θ^\hat\thetaθ^ is its belief about the buyer, and the buyer with probability 1−γ1-\gamma1−γ, offering kq2kq^2kq2.

The O-Learning game has three stages.

  1. Each buyer submits a quality request q(θ)≥0q(\theta)\ge 0q(θ)≥0.
  2. The seller, holding a posterior belief θ^(q)\hat\theta(q)θ^(q), accepts or rejects the request. It accepts if and only if its expected profit is nonnegative:
γ(θ^q−kq2)−sq2≥0.\gamma(\hat\theta q-kq^2)-sq^2\ge 0.γ(θ^q−kq2)−sq2≥0.
  1. The price is set as above. A rejected request ends the game with payoff 000 to both parties.

A buyer of true preference θ\thetaθ whose request qqq is accepted under belief θ^\hat\thetaθ^ expects

μ(q,θ,θ^)=γmax⁡{θq−θ^q,0}+(1−γ)max⁡{θq−kq2,0}.(9)\mu(q,\theta,\hat\theta)=\gamma\max\{\theta q-\hat\theta q,0\}+(1-\gamma)\max\{\theta q-kq^2,0\}.\tag{9}μ(q,θ,θ^)=γmax{θq−θ^q,0}+(1−γ)max{θq−kq2,0}.(9)

A separating equilibrium consists of distinct requests qH≠qLq_H\ne q_LqH​=qL​ and a belief function θ^(⋅)\hat\theta(\cdot)θ^(⋅) satisfying three conditions. Beliefs are consistent on the equilibrium path: θ^(qH)=θH\hat\theta(q_H)=\theta_Hθ^(qH​)=θH​ and θ^(qL)=θL\hat\theta(q_L)=\theta_Lθ^(qL​)=θL​. Beliefs off the path are arbitrary. No type gains by deviating to any other request q≥0q\ge 0q≥0.

If the preference were public, the buyer would choose qqq to maximize μ(q,θ,θ)\mu(q,\theta,\theta)μ(q,θ,θ) subject to acceptance. The solution is the first-best request

q∗(θ)=min⁡{γθs+γk, θ2k}.q^*(\theta)=\min\Big\{\frac{\gamma\theta}{s+\gamma k},\ \frac{\theta}{2k}\Big\}.q∗(θ)=min{s+γkγθ​, 2kθ​}.

The thresholds are

ΛH1=γ(s+k)(1−γ)s,ΛH2=1+γ1−γ,ΛL=sγk,Λ=max⁡{min⁡{ΛH1,ΛH2},ΛL}.\Lambda_{H1}=\frac{\gamma(s+k)}{(1-\gamma)s},\qquad \Lambda_{H2}=\frac{1+\gamma}{1-\gamma},\qquad \Lambda_L=\frac{s}{\gamma k},\qquad \Lambda=\max\{\min\{\Lambda_{H1},\Lambda_{H2}\},\Lambda_L\}.ΛH1​=(1−γ)sγ(s+k)​,ΛH2​=1−γ1+γ​,ΛL​=γks​,Λ=max{min{ΛH1​,ΛH2​},ΛL​}.

Formalization targets

Goal: Proposition 3 (p. 17)

The requests qHO=q∗(θH)q^O_H=q^*(\theta_H)qHO​=q∗(θH​), qLO=q∗(θL)q^O_L=q^*(\theta_L)qLO​=q∗(θL​) form a separating equilibrium for some belief function if and only if

θHθL≥Λ.\frac{\theta_H}{\theta_L}\ge\Lambda.θL​θH​​≥Λ.

When this holds, the equilibrium is supported by the out-of-equilibrium belief θ^(q)=θL\hat\theta(q)=\theta_Lθ^(q)=θL​ if γ≤s/k\gamma\le s/kγ≤s/k, and by θ^(q)=θH\hat\theta(q)=\theta_Hθ^(q)=θH​ if γ≥s/k\gamma\ge s/kγ≥s/k.

Milestones

In attack order:

  1. Seller acceptance (§3.3, p. 16). For q≥0q\ge 0q≥0, the seller accepts a request iff q≤γθ^/(s+γk)q\le\gamma\hat\theta/(s+\gamma k)q≤γθ^/(s+γk).
  2. The first-best request solves (10) (§3.3, p. 16). q∗(θ)q^*(\theta)q∗(θ) is the unique maximizer of μ(q,θ,θ)\mu(q,\theta,\theta)μ(q,θ,θ) over the acceptable requests.
  3. The case form of q∗q^*q∗ (Appendix, Proof of Proposition 3, p. 28). q∗(θ)=γθ/(s+γk)q^*(\theta)=\gamma\theta/(s+\gamma k)q∗(θ)=γθ/(s+γk) if γ≤s/k\gamma\le s/kγ≤s/k, and q∗(θ)=θ/(2k)q^*(\theta)=\theta/(2k)q∗(θ)=θ/(2k) if γ≥s/k\gamma\ge s/kγ≥s/k.
  4. Necessity of (11)–(12) (p. 17). If (qHO,qLO)(q^O_H,q^O_L)(qHO​,qLO​) is a separating equilibrium under any beliefs, then
μ(q∗(θH),θH,θH)≥μ(q∗(θL),θH,θL)andμ(q∗(θL),θL,θL)≥μ(q∗(θH),θL,θH).\mu(q^*(\theta_H),\theta_H,\theta_H)\ge\mu(q^*(\theta_L),\theta_H,\theta_L)\quad\text{and}\quad\mu(q^*(\theta_L),\theta_L,\theta_L)\ge\mu(q^*(\theta_H),\theta_L,\theta_H).μ(q∗(θH​),θH​,θH​)≥μ(q∗(θL​),θH​,θL​)andμ(q∗(θL​),θL​,θL​)≥μ(q∗(θH​),θL​,θH​).
  1. γ≤s/k\gamma\le s/kγ≤s/k (p. 28). ICH′  ⟺  θH/θL≥ΛH1\mathrm{IC}'_H\iff\theta_H/\theta_L\ge\Lambda_{H1}ICH′​⟺θH​/θL​≥ΛH1​, and ICL′  ⟺  θH/θL≥ΛL\mathrm{IC}'_L\iff\theta_H/\theta_L\ge\Lambda_LICL′​⟺θH​/θL​≥ΛL​.
  2. γ≥s/k\gamma\ge s/kγ≥s/k (p. 28). ICH′  ⟺  θH/θL≥ΛH2\mathrm{IC}'_H\iff\theta_H/\theta_L\ge\Lambda_{H2}ICH′​⟺θH​/θL​≥ΛH2​, and ICL′\mathrm{IC}'_LICL′​ holds strictly.
  3. ΛH1≤ΛH2  ⟺  γ≤s/k\Lambda_{H1}\le\Lambda_{H2}\iff\gamma\le s/kΛH1​≤ΛH2​⟺γ≤s/k (p. 28).

Significance

Proposition 3 locates the boundary of truthful self-design. Above Λ\LambdaΛ, a buyer who designs its own product can both reveal its type and obtain its full-information design. The seller then learns preferences without distorting quality. Below Λ\LambdaΛ, the companion mission shows that no separating equilibrium exists at all. The paper builds on this threshold. Proposition 7 compares Λ\LambdaΛ with the A-Learning threshold Δ\DeltaΔ to decide which learning mode supports customization over a wider range of preferences. Proposition 8 compares the seller's and buyers' payoffs in the two separating equilibria and shows that the seller prefers to design while the buyers prefer to self-design.

The result is proved in the paper's Appendix. As far as the series' searches show, it has not been machine-checked. This mission poses a formal version of the O-Learning game, its equilibrium notion, and the deviation arguments the paper sketches in a sentence each.

Difficulty

The incentive constraints are polynomial inequalities in the ratio θH/θL\theta_H/\theta_LθH​/θL​ once q∗q^*q∗ is substituted. The work is elsewhere.

First, the equilibrium quantifies over every request q≥0q\ge 0q≥0, not only over mimicking the other type. A deviation interacts with the belief the seller holds at that request and with the acceptance rule, and the payoff (9) has two kinks. The proof shows that the two stated off-path beliefs deter every deviation. Each regime needs a different belief: the low-type belief works when the acceptance constraint binds at the first-best, and the high-type belief works when it does not.

Second, the "only if" direction has to hold for every belief function. The argument must show that mimicking the other type's first-best request is always accepted, whatever the seller believes elsewhere.

Third, the paper's proof writes the payoffs without the max⁡{⋅,0}\max\{\cdot,0\}max{⋅,0} terms. Those identities hold only on part of the domain, and the formal argument has to track where.

Formalization scope

The O-Learning objects live in the namespace CustomerVoice.OLearn, in a single definition file. The model is a structure with real fields θH,θL,α,γ,k,s\theta_H,\theta_L,\alpha,\gamma,k,sθH​,θL​,α,γ,k,s. Buyer types use the shared CustomerVoice.ALearn.BType, an inductive type with constructors H and L. The standing assumptions θH>θL>0\theta_H>\theta_L>0θH​>θL​>0, α,γ∈(0,1)\alpha,\gamma\in(0,1)α,γ∈(0,1) and k,s>0k,s>0k,s>0 are a hypothesis of every theorem. α\alphaα does not enter this mission but is kept as printed. No other hypothesis is added.

Commitments of the formalization:

  • Qualities, requests and deviations are real numbers q≥0q\ge 0q≥0.
  • The payoff μ\muμ keeps both max⁡{⋅,0}\max\{\cdot,0\}max{⋅,0} terms.
  • The seller accepts at indifference, as the paper prints its acceptance rule.
  • A rejected request pays 000.
  • A belief function is any total map from requests to the two types. It is pinned only on the equilibrium path.
  • The price stage is in reduced form, entering only through (9) and the acceptance inequality.
  • Optimality in (10) is stated as attainment of the maximum (IsMaxOn on the acceptable interval) together with uniqueness.

Ruled-out trivializations. Acceptance is the printed inequality, not the threshold q≤γθ^/(s+γk)q\le\gamma\hat\theta/(s+\gamma k)q≤γθ^/(s+γk), which is milestone 1. The requests are q∗(θ)q^*(\theta)q∗(θ), and milestone 2 proves that q∗(θ)q^*(\theta)q∗(θ) solves (10). The equilibrium is a perfect Bayesian equilibrium against all deviations, not the conjunction of (11) and (12). The "only if" direction quantifies over all belief functions. Λ\LambdaΛ is the printed expression, not an infimum of ratios at which an equilibrium exists.

The development needs only elementary real algebra and one-variable concave quadratics from Mathlib. The equilibrium definition is a template for the other O-Learning mission of the series. Proofs of any milestone, and alternative arguments for the deviation step, are welcome.

The source is the SSRN author version (SSRN 3994319, version of 2023-11-29). All page and display numbers refer to it, and the proofs behind the milestones are in its Appendix.

Selected references

  • Liang Guo, The Voice of Customers in Customization, SSRN working paper 3994319, version of 2023-11-29. https://ssrn.com/abstract=3994319
  • Liang Guo, The Voice of Customers in Customization, Management Science. https://doi.org/10.1287/mnsc.2021.04025
  • Vincent P. Crawford and Joel Sobel, Strategic Information Transmission, Econometrica 50(6), 1982. https://doi.org/10.2307/1913390
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EconomicsOperations ResearchProbability·Captain: mikedeng1

Information Design for Congested Social Services: Optimal Need-Based Persuasion 3: Information Design Pareto-Dominates Full Information Exactly When Low-Need Arrivals Exceed a ThresholdResearch Paper

Motivation

Public and nonprofit services such as food banks, shelters, free clinics and legal aid often run with too little capacity and serve two kinds of users: people with no alternative, and people who have a reasonable outside option. When the queue is long, a user who has an alternative but joins anyway imposes waiting costs on everyone behind them, including the users who cannot go elsewhere. Pricing is usually ruled out in such settings, which leaves the provider one lever: what it tells arriving users about congestion.

Anunrojwong, Iyer and Manshadi (arXiv:2005.07253v3; Management Science, 2023) study this lever as a Bayesian persuasion problem in a queue, building on the revenue-maximization model of Lingenbrink and Iyer (Operations Research 67(5):1397–1416, 2019). The natural benchmark is full information: announce the queue length and let users decide. This mission formalizes the paper's answer to when full information can be improved for both user types at once, and by how much.

Setting

A single server serves users first come, first served, with exponential service times of rate 111. High-need users (type H) arrive as a Poisson stream of rate λH≥0\lambda_H\ge0λH​≥0 and always join. Low-need users (type L) arrive at rate λL>0\lambda_L>0λL​>0 and either join or take an outside option worth 000. Write λ=λL+λH≤1\lambda=\lambda_L+\lambda_H\le1λ=λL​+λH​≤1. A type-iii user who joins with nnn users already present receives utility ui(n)u_i(n)ui​(n). The standing assumptions are ui(0)>0u_i(0)>0ui​(0)>0, ui(k)<0u_i(k)<0ui​(k)<0 for some kkk, each uiu_iui​ strictly decreasing, and the increments uL(n)−uL(n+1)u_L(n)-u_L(n+1)uL​(n)−uL​(n+1) non-increasing (Assumption 1).

By a revelation-principle argument (Lemma 1 of the paper, from Lingenbrink and Iyer), a recommendation mechanism that users obey is described by the queue's stationary distribution π=(πn)n≥0\pi=(\pi_n)_{n\ge0}π=(πn​)n≥0​. An admission policy is a distribution with λHπn≤πn+1≤λπn\lambda_H\pi_n\le\pi_{n+1}\le\lambda\pi_nλH​πn​≤πn+1​≤λπn​ for all nnn; their set is ΠAP\Pi_{AP}ΠAP​. A signaling mechanism is an admission policy that also satisfies the obedience constraints

J(π)=∑n≥0(πn+1−λHπn)uL(n)≥0,L(π)=∑n≥0(λπn−πn+1)uL(n)≤0,J(\pi)=\sum_{n\ge0}(\pi_{n+1}-\lambda_H\pi_n)u_L(n)\ge0,\qquad L(\pi)=\sum_{n\ge0}(\lambda\pi_n-\pi_{n+1})u_L(n)\le0,J(π)=n≥0∑​(πn+1​−λH​πn​)uL​(n)≥0,L(π)=n≥0∑​(λπn​−πn+1​)uL​(n)≤0,

called (JOIN) and (LEAVE); their set is ΠSM\Pi_{SM}ΠSM​. The welfare of the two types is WL(π)=J(π)W_L(\pi)=J(\pi)WL​(π)=J(π) and WH(π)=λH∑nπnuH(n)W_H(\pi)=\lambda_H\sum_n\pi_nu_H(n)WH​(π)=λH​∑n​πn​uH​(n). A policy π^\hat\piπ^ Pareto-dominates π\piπ if it is at least as good for both types and strictly better for one; π\piπ is Pareto-efficient within a class if no member of the class dominates it.

A threshold policy πx\pi_xπx​, x=m+a≥0x=m+a\ge0x=m+a≥0, admits L users when fewer than mmm users are present, admits them with probability aaa at mmm, and turns them away above mmm. Write WL(x)W_L(x)WL​(x), WH(x)W_H(x)WH​(x) and L(x)L(x)L(x) for its welfare and (LEAVE) value. The full-information threshold mfim_{fi}mfi​ is the smallest kkk with uL(k)<0u_L(k)<0uL​(k)<0, and the full-information mechanism is fi=πmfi\mathsf{fi}=\pi_{m_{fi}}fi=πmfi​​.

Formalization targets

Goal: Proposition 3(1)–(2)

For λH∈(0,1)\lambda_H\in(0,1)λH​∈(0,1), with uL,uHu_L,u_HuL​,uH​ fixed, there is a threshold ΛˉL(λH)∈(0,1−λH]\bar\Lambda_L(\lambda_H)\in(0,1-\lambda_H]ΛˉL​(λH​)∈(0,1−λH​] such that some signaling mechanism Pareto-dominates fi\mathsf{fi}fi if and only if λL≥ΛˉL(λH)\lambda_L\ge\bar\Lambda_L(\lambda_H)λL​≥ΛˉL​(λH​), and

ΛˉL(λH) ≥ (1−λH) uL(mfi−1)uL(0)−∑k=1mfi−1λHk(uL(k−1)−uL(k)) > 0.\bar\Lambda_L(\lambda_H)\ \ge\ (1-\lambda_H)\,\frac{u_L(m_{fi}-1)}{u_L(0)-\sum_{k=1}^{m_{fi}-1}\lambda_H^k\big(u_L(k-1)-u_L(k)\big)}\ >\ 0 .ΛˉL​(λH​) ≥ (1−λH​)uL​(0)−∑k=1mfi​−1​λHk​(uL​(k−1)−uL​(k))uL​(mfi​−1)​ > 0.

If moreover λ<1\lambda<1λ<1, uL(mfi−1)≤WL(fi)u_L(m_{fi}-1)\le W_L(\mathsf{fi})uL​(mfi​−1)≤WL​(fi), uH(mfi)≤WH(fi)u_H(m_{fi})\le W_H(\mathsf{fi})uH​(mfi​)≤WH​(fi), L(mfi−1)≤0L(m_{fi}-1)\le0L(mfi​−1)≤0 and WH(fi)>0W_H(\mathsf{fi})>0WH​(fi)>0, then a signaling mechanism sm\mathsf{sm}sm exists with

WL(sm)≥βL,smWL(fi),WH(sm)≥βH,smWH(fi),W_L(\mathsf{sm})\ge\beta_{L,sm}W_L(\mathsf{fi}),\qquad W_H(\mathsf{sm})\ge\beta_{H,sm}W_H(\mathsf{fi}),WL​(sm)≥βL,sm​WL​(fi),WH​(sm)≥βH,sm​WH​(fi),

where βL,sm=1+λH(1−λ)λLλmfi−11−λH−λLλmfi−1>1\beta_{L,sm}=1+\frac{\lambda_H(1-\lambda)\lambda_L\lambda^{m_{fi}-1}}{1-\lambda_H-\lambda_L\lambda^{m_{fi}-1}}>1βL,sm​=1+1−λH​−λL​λmfi​−1λH​(1−λ)λL​λmfi​−1​>1 and βH,sm=1+(1−λH)(1−λ)λLλmfi−11−λH−λLλmfi−1>1\beta_{H,sm}=1+\frac{(1-\lambda_H)(1-\lambda)\lambda_L\lambda^{m_{fi}-1}}{1-\lambda_H-\lambda_L\lambda^{m_{fi}-1}}>1βH,sm​=1+1−λH​−λL​λmfi​−1(1−λH​)(1−λ)λL​λmfi​−1​>1.

Milestones

  • Lemma 3: the geometric sandwich λHk−qπq≤πk≤λk−qπq\lambda_H^{k-q}\pi_q\le\pi_k\le\lambda^{k-q}\pi_qλHk−q​πq​≤πk​≤λk−qπq​ on ΠAP\Pi_{AP}ΠAP​.
  • Theorems 1 and 2: Pareto-efficient signaling mechanisms and admission policies have a threshold structure with threshold at most mfim_{fi}mfi​.
  • Lemma 2: maximizers of θWL+(1−θ)WH\theta W_L+(1-\theta)W_HθWL​+(1−θ)WH​ exist.
  • Theorem 3: when (LEAVE) is slack, efficiency within ΠSM\Pi_{SM}ΠSM​ and within ΠAP\Pi_{AP}ΠAP​ coincide.
  • Lemma 5(1)–(2): WH(x)W_H(x)WH​(x) is strictly decreasing, and WL(x)W_L(x)WL​(x) is unimodal and monotone between consecutive integers.
  • fi∈ΠSM\mathsf{fi}\in\Pi_{SM}fi∈ΠSM​ with L(fi)<0L(\mathsf{fi})<0L(fi)<0.
  • Theorem 4: exactly one of "fi\mathsf{fi}fi is Pareto-efficient among admission policies" and "a signaling mechanism dominates fi\mathsf{fi}fi" holds, the first if and only if WL(mfi)>WL(mfi−1)W_L(m_{fi})>W_L(m_{fi}-1)WL​(mfi​)>WL​(mfi​−1).
  • From the proof of Proposition 3: the equivalence of that condition with f(λL,λH)<0f(\lambda_L,\lambda_H)<0f(λL​,λH​)<0, an identity for WL(m−1)W_L(m-1)WL​(m−1) and an inequality for WH(m−1)W_H(m-1)WH​(m−1), for 1≤m≤mfi1\le m\le m_{fi}1≤m≤mfi​.

Significance

The proposition gives a clean regime split. Full information is already Pareto-efficient when low-need demand is light. Once λL\lambda_LλL​ crosses an explicit level, revealing everything leaves welfare on the table for both types, so a provider who cares about either group has a reason to hide some queue information. The lower bound on ΛˉL\bar\Lambda_LΛˉL​ is explicit in the primitives, and the factors βL,sm,βH,sm\beta_{L,sm},\beta_{H,sm}βL,sm​,βH,sm​ give a guaranteed improvement, not only an existence statement. Theorem 4, the milestone behind part 1, reduces the comparison to two adjacent thresholds.

The paper proves these results on paper. To our knowledge none of them has a machine-checked proof. A formal development checks the "little algebra" steps that the paper compresses (the equivalence with f<0f<0f<0, the welfare identities of p. 41–42). It also produces a reusable layer for persuasion in birth–death queues: obedient mechanisms as distributions, threshold policies, and Pareto efficiency within a class. The companion missions of this series (threshold structure, the homogeneous case, first-best) are stated over the same layer.

Difficulty

The threshold ΛˉL\bar\Lambda_LΛˉL​ comes from analysing the sign of f(⋅,λH)f(\cdot,\lambda_H)f(⋅,λH​) on (0,1−λH](0,1-\lambda_H](0,1−λH​]. Translating "fi is not dominated" into that sign condition is where the work lies. The obvious attempt, comparing fi\mathsf{fi}fi only with nearby threshold policies, settles one direction: if WL(mfi−1)≥WL(mfi)W_L(m_{fi}-1)\ge W_L(m_{fi})WL​(mfi​−1)≥WL​(mfi​), the threshold mfi−1m_{fi}-1mfi​−1 dominates. The converse needs every competitor in ΠAP\Pi_{AP}ΠAP​, not just threshold policies. That requires the structure theorem for efficient admission policies, the existence of maximizers, and unimodality of WLW_LWL​, followed by a transfer from ΠAP\Pi_{AP}ΠAP​ to ΠSM\Pi_{SM}ΠSM​ that only works because (LEAVE) is slack at fi\mathsf{fi}fi. The welfare series are infinite, and the threshold family is parametrised by a real xxx whose fractional part enters nonlinearly, so the comparisons are not finite-dimensional linear algebra.

Formalization scope

Everything is stated over a structure Model with real fields λL,λH\lambda_L,\lambda_HλL​,λH​ and utilities uL,uH:N→Ru_L,u_H:\mathbb N\to\mathbb RuL​,uH​:N→R, with a predicate Standing holding the standing assumptions (lim⁡kui(k)<0\lim_ku_i(k)<0limk​ui​(k)<0 is encoded as ∃k, ui(k)<0\exists k,\ u_i(k)<0∃k, ui​(k)<0). Queue lengths are natural numbers, and the two types are separate fields. Membership in ΠAP\Pi_{AP}ΠAP​ includes summability of πnuL(n)\pi_nu_L(n)πn​uL​(n) and πnuH(n)\pi_nu_H(n)πn​uH​(n): the paper treats all welfare as finite, and an unrestricted tsum would assign 000 to divergent welfare. WLW_LWL​ is the right-hand form of (2), with no division by λLπn\lambda_L\pi_nλL​πn​. A finite threshold requires π∈ΠAP\pi\in\Pi_{AP}π∈ΠAP​, πm>0\pi_m>0πm​>0 and a joining fraction in [0,1][0,1][0,1], as in Definition 2. Threshold policies are defined from their unnormalised weights, fi\mathsf{fi}fi is πmfi\pi_{m_{fi}}πmfi​​ as a distribution, and Pareto efficiency is Definition 1 within an explicit class. "Exactly one" is exclusive or.

Added hypotheses, each disclosed in the item that carries it:

  1. Convergence of ∑nλHnuH(n)\sum_n\lambda_H^nu_H(n)∑n​λHn​uH​(n). This is the finite-welfare convention, equivalent to ΠAP≠∅\Pi_{AP}\ne\emptysetΠAP​=∅ when λH>0\lambda_H>0λH​>0.
  2. Lemma 2's hypothesis (λ<1\lambda<1λ<1, or uL,uH→−∞u_L,u_H\to-\inftyuL​,uH​→−∞) wherever existence of maximizers is used.
  3. uL(mfi−1)≠0u_L(m_{fi}-1)\ne0uL​(mfi​−1)=0 in Proposition 3. Without it the claimed ΛˉL>0\bar\Lambda_L>0ΛˉL​>0 is false.
  4. λH>0\lambda_H>0λH​>0 in Lemma 5(1) and Theorem 4, as required by §4.2's heterogeneous setting. For λH=0\lambda_H=0λH​=0, WH≡0W_H\equiv0WH​≡0, and Theorem 4's strict adjacent-threshold comparison can fail at a tie.

The page's range λL∈[ΛˉL,1)\lambda_L\in[\bar\Lambda_L,1)λL​∈[ΛˉL​,1) is intersected with λ≤1\lambda\le1λ≤1. In part 2, "sm\mathsf{sm}sm" is read existentially.

Ruled out as trivializing: choosing ΛˉL\bar\Lambda_LΛˉL​ after λL\lambda_LλL​ (the goal quantifies it once, with λH,uL,uH\lambda_H,u_L,u_HλH​,uL​,uH​ fixed); defining fi\mathsf{fi}fi through its welfare; replacing Pareto efficiency by maximization of a weighted welfare; replacing exclusive or by inclusive or; and any constant that differs from the page's βL,sm\beta_{L,sm}βL,sm​, βH,sm\beta_{H,sm}βH,sm​ or lower bound symbol for symbol.

A complete development needs geometric and arithmetico-geometric series, rearrangement of infinite sums over N\mathbb NN, and convexity arguments in the space of summable sequences. Proofs of any milestone are welcome, as are lemmas about threshold policies that the other missions of the series can reuse.

Selected references

  • J. Anunrojwong, K. Iyer, V. Manshadi, Information Design for Congested Social Services: Optimal Need-Based Persuasion, Management Science, 2023; read as arXiv:2005.07253v3 (2022). https://arxiv.org/abs/2005.07253
  • D. Lingenbrink, K. Iyer, Optimal Signaling Mechanisms in Unobservable Queues, Operations Research 67(5):1397–1416, 2019.
  • E. Kamenica, M. Gentzkow, Bayesian Persuasion, American Economic Review 101(6), 2011. https://doi.org/10.1257/aer.101.6.2590
  • D. Gross, J. F. Shortle, J. M. Thompson, C. M. Harris, Fundamentals of Queueing Theory, 5th ed., Wiley, 2018.
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EconomicsOperations Research·Captain: mikedeng1

Softening Competition Through Unilateral Sharing of Customer Data: For Every Monotone-Hazard-Rate Distribution, Sharing Data on [z^N, b′] Makes Both Firms Strictly Better OffResearch Paper

Why a firm would hand customer data to a rival

Large platforms that also sell their own products (Amazon, JD.com, app stores) hold detailed data on consumers and sometimes share part of it with the independent sellers they compete with. The usual view in the personalized-pricing literature is that information is a competitive weapon: a firm that knows more about consumers can price discriminate and capture more surplus, so giving that knowledge to a rival should only hurt. Thisse and Vives (American Economic Review, 1988) showed that when both firms on a Hotelling line can price every consumer individually, competition intensifies and the profits of the informed firm fall.

Choe, Cong and Wang (Monash Discussion Paper 2021-10, revised October 20, 2022; published in Management Science, 2024, doi:10.1287/mnsc.2023.4689) show that this is not the whole picture: an informed firm can strictly gain by sharing data on a well-chosen segment of consumers with an uninformed rival, and the rival gains too. This mission formalizes that result, Proposition 1 of the paper, together with the steps its proof is built from.

Setting

Consumers are located on the interval [0,1][0,1][0,1]. A consumer's location has cumulative distribution function FFF with density f>0f>0f>0, continuous on [0,1][0,1][0,1], and the hazard rate

h(x)=f(x)1−F(x)h(x)=\frac{f(x)}{1-F(x)}h(x)=1−F(x)f(x)​

is strictly increasing on [0,1)[0,1)[0,1) (the monotone hazard rate condition). Firm 1 sits at 000 and knows every consumer's location; firm 2 sits at 111 and knows none. A consumer at xxx who buys from firm iii at price pip_ipi​ pays pip_ipi​ plus a transport cost equal to her distance to firm iii; production is costless and the market is fully covered.

Benchmark. Without data sharing, firm 2 sets one uniform price p2p_2p2​ and firm 1 undercuts it consumer by consumer, so firm 2 serves [z,1][z,1][z,1] with p2=2z−1p_2=2z-1p2​=2z−1 and earns (2z−1)(1−F(z))(2z-1)(1-F(z))(2z−1)(1−F(z)). The first-order condition gives the benchmark marginal consumer zNz^NzN and price p2Np^N_2p2N​:

zN=12+1h(zN),p2N=2h(zN)=2zN−1.z^N=\frac12+\frac1{h(z^N)},\qquad p^N_2=\frac2{h(z^N)}=2z^N-1.zN=21​+h(zN)1​,p2N​=h(zN)2​=2zN−1.

The benchmark profits are π1N=∫0zN(p2N+1−2x) dF(x)\pi^N_1=\int_0^{z^N}(p^N_2+1-2x)\,dF(x)π1N​=∫0zN​(p2N​+1−2x)dF(x) and π2N=p2N(1−F(zN))\pi^N_2=p^N_2(1-F(z^N))π2N​=p2N​(1−F(zN)).

Data sharing on [a,b][a,b][a,b]. Firm 1 gives firm 2 the locations of the consumers in [a,b][a,b][a,b]. Firm 2 then chooses a uniform price for the consumers it does not know and personalized prices on [a,b][a,b][a,b]. Its uniform price either serves only [b,1][b,1][b,1], at price 2b−12b-12b−1 and profit π21(b)=(2b−1)(1−F(b))\pi_{21}(b)=(2b-1)(1-F(b))π21​(b)=(2b−1)(1−F(b)), or serves [z′,a]∪[b,1][z',a]\cup[b,1][z′,a]∪[b,1] for some z′≤az'\le az′≤a, with best profit

π22(a,b)=max⁡z′∈[0,a](2z′−1)(1−F(b)+F(a)−F(z′)).\pi_{22}(a,b)=\max_{z'\in[0,a]}(2z'-1)\bigl(1-F(b)+F(a)-F(z')\bigr).π22​(a,b)=z′∈[0,a]max​(2z′−1)(1−F(b)+F(a)−F(z′)).

When firm 2 chooses the first option, the profits are

π1(a,b)=∫0a((2b−1)+(1−2x)) dF(x),π2(a,b)=∫ab(2x−1) dF(x)+π21(b).\pi_1(a,b)=\int_0^a\bigl((2b-1)+(1-2x)\bigr)\,dF(x),\qquad \pi_2(a,b)=\int_a^b(2x-1)\,dF(x)+\pi_{21}(b).π1​(a,b)=∫0a​((2b−1)+(1−2x))dF(x),π2​(a,b)=∫ab​(2x−1)dF(x)+π21​(b).

Firm 2's incentive constraint (IC) is π21(b)≥π22(a,b)\pi_{21}(b)\ge\pi_{22}(a,b)π21​(b)≥π22​(a,b).

Formalization targets

Goal: Proposition 1

For every distribution (F,f)(F,f)(F,f) satisfying the conditions above:

π1(zN,b)>π1Nandπ2(zN,b)>π2Nfor all b∈(zN,1],\pi_1(z^N,b)>\pi^N_1\quad\text{and}\quad\pi_2(z^N,b)>\pi^N_2\qquad\text{for all } b\in(z^N,1],π1​(zN,b)>π1N​andπ2​(zN,b)>π2N​for all b∈(zN,1],

and there exists b′∈(zN,1)b'\in(z^N,1)b′∈(zN,1) with

π21(b′)>π22(zN,b′),\pi_{21}(b')>\pi_{22}(z^N,b'),π21​(b′)>π22​(zN,b′),

so sharing data on [zN,b′][z^N,b'][zN,b′] satisfies firm 2's incentive constraint and makes both firms strictly better off than without sharing.

Milestones

  1. Eq. (1): zNz^NzN exists and is unique in (1/2,1)(1/2,1)(1/2,1).
  2. zNz^NzN is the unique maximizer of π21\pi_{21}π21​ on [0,1][0,1][0,1].
  3. Lemma 2: if firm 2's uniform price serves [z′,a]∪[b,1][z',a]\cup[b,1][z′,a]∪[b,1] with z′z'z′ solving the first-order condition (5), then z′<zNz'<z^Nz′<zN, firm 2's price falls below p2Np^N_2p2N​, and firm 1 earns less than π1N\pi^N_1π1N​.
  4. π1(zN,b)−π1N=2(b−zN)F(zN)\pi_1(z^N,b)-\pi^N_1=2(b-z^N)F(z^N)π1​(zN,b)−π1N​=2(b−zN)F(zN).
  5. π2(zN,b)−π2N>∫b1(2b−2zN) dF(x)>0\pi_2(z^N,b)-\pi^N_2>\int_b^1(2b-2z^N)\,dF(x)>0π2​(zN,b)−π2N​>∫b1​(2b−2zN)dF(x)>0 for zN<b<1z^N<b<1zN<b<1.
  6. With π^22(b)=π22(zN,b)\hat\pi_{22}(b)=\pi_{22}(z^N,b)π^22​(b)=π22​(zN,b): π21(zN)=π^22(zN)\pi_{21}(z^N)=\hat\pi_{22}(z^N)π21​(zN)=π^22​(zN) and π21(1)<π^22(1)\pi_{21}(1)<\hat\pi_{22}(1)π21​(1)<π^22​(1).
  7. π^22(b)<π^22(zN)\hat\pi_{22}(b)<\hat\pi_{22}(z^N)π^22​(b)<π^22​(zN) for every b∈(zN,1]b\in(z^N,1]b∈(zN,1].

Significance

The result reverses the standard intuition that a firm's informational advantage should be guarded. Firm 1 shares data only on firm 2's own customer base [zN,b′][z^N,b'][zN,b′], which it could not win anyway, and keeps the data on the most loyal consumers [b′,1][b',1][b′,1] private. Firm 2 then prefers to extract surplus from those loyal consumers with a high uniform price 2b′−1>p2N2b'-1>p^N_22b′−1>p2N​, and firm 1 raises its personalized prices accordingly. Competition is softened without firm 1 conceding market share. The statement holds for every monotone-hazard-rate distribution, not for a parametric family, which is what makes it a structural claim rather than a numerical example. It underlies the paper's analysis of optimal data sharing (Section 3.3) and its welfare conclusion that consumer surplus falls (Proposition 3), and it is the benchmark against which the paper's extensions (sales fees, data sale, entry) are compared.

The paper's proof is complete for the first part. For the existence of b′b'b′, the written argument infers a negative derivative of π^22\hat\pi_{22}π^22​ at zNz^NzN from a strict inequality, which does not follow as written and presupposes differentiability of a maximum value function; the statement itself is true. A machine-checked proof closes that step. To the best of current knowledge none of these results has been formalized.

Difficulty

The two profit comparisons in the first part are integral identities and estimates that only need the fundamental theorem of calculus and f>0f>0f>0. The existence of b′b'b′ is the hard part. Both π21(b)\pi_{21}(b)π21​(b) and π^22(b)\hat\pi_{22}(b)π^22​(b) start from the same value at b=zNb=z^Nb=zN, and π21\pi_{21}π21​ has zero derivative there, so the comparison is decided at first order by how fast π^22\hat\pi_{22}π^22​ decreases. But π^22\hat\pi_{22}π^22​ is a maximum over z′∈[0,zN]z'\in[0,z^N]z′∈[0,zN] whose maximizer moves with bbb and need not be unique, so π^22\hat\pi_{22}π^22​ is not known to be differentiable, and the strict decrease of milestone 7 alone does not give a linear rate. A proof has to bound π^22(b)\hat\pi_{22}(b)π^22​(b) from above by π21(zN)\pi_{21}(z^N)π21​(zN) minus a term proportional to b−zNb-z^Nb−zN, uniformly over the possible maximizers, and compare it with the second-order behaviour of π21\pi_{21}π21​ near its maximum. Existence of zNz^NzN similarly needs the hazard rate to blow up at 111, which uses F(1)=1F(1)=1F(1)=1 and f(1)>0f(1)>0f(1)>0.

Formalization scope

All objects are real-valued functions on R\mathbb RR with hypotheses only on [0,1][0,1][0,1]. The distribution is the structure MHRDist F f: F(0)=0F(0)=0F(0)=0, F(1)=1F(1)=1F(1)=1, FFF has derivative fff within [0,1][0,1][0,1] at every point of [0,1][0,1][0,1], fff is continuous and strictly positive on [0,1][0,1][0,1], and h=f/(1−F)h=f/(1-F)h=f/(1−F) is strictly increasing on [0,1)[0,1)[0,1). The paper's "smooth" is read as continuously differentiable, a weaker assumption, so the formal theorems are at least as strong as the paper's. Every dFdFdF integral is an interval integral of the integrand times fff, always with increasing bounds. zNz^NzN enters as a number zN with the hypothesis IsZN F f zN (zN∈(1/2,1)z^N\in(1/2,1)zN∈(1/2,1) and zN=1/2+1/h(zN)z^N=1/2+1/h(z^N)zN=1/2+1/h(zN)); milestone 1 shows exactly one such number exists, so no statement is vacuous. π22\pi_{22}π22​ is defined as the supremum of the profit over z′∈[0,a]z'\in[0,a]z′∈[0,a] (a maximum, since the set is compact and the function continuous), never through the first-order condition (5); the incentive inequality in the goal is strict, as in the paper's proof.

A trivializing formalization is ruled out: π22\pi_{22}π22​ is the actual maximum, not a free parameter or the value at a stationary point, and zNz^NzN is pinned by Eq. (1), whose solution is shown to exist.

A complete development needs the fundamental theorem of calculus for interval integrals, compactness and the intermediate value theorem on [0,1][0,1][0,1], and a uniform first-order estimate on a parametric maximum. The lemmas on hazard rates and on the maximizer of (2z−1)(1−F(z))(2z-1)(1-F(z))(2z−1)(1−F(z)) are reusable for other Hotelling and pricing models with monotone-hazard-rate demand. Contributions are welcome on any milestone, and alternative proofs of the existence of b′b'b′ are of particular interest.

Selected references

  • Chongwoo Choe, Jiajia Cong, Chengsi Wang, Softening Competition through Unilateral Sharing of Customer Data, Monash University Department of Economics Discussion Paper 2021-10, revised October 20, 2022 (the version formalized here; all page and equation numbers refer to it); published in Management Science, 2024. https://doi.org/10.1287/mnsc.2023.4689
  • Jacques-François Thisse, Xavier Vives, On the Strategic Choice of Spatial Price Policy, American Economic Review 78(1), 1988, 127–137.
  • Greg Shaffer, Z. John Zhang, Competitive One-to-One Promotions, Management Science 48(9), 2002, 1143–1160.
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EconomicsOperations Research·Captain: mikedeng1

The Voice of Customers in Customization IV: The A-Learning Threshold Δ Exceeds the O-Learning Threshold Λ If and Only If γ < max{2s/(2s+k), (√(s²+4sk) − s)/(2k)}Research Paper

Motivation

A seller who customizes products for buyers must learn what each buyer wants, and buyers have private information about how much they value quality. Liang Guo's paper The Voice of Customers in Customization (Management Science, doi:10.1287/mnsc.2021.04025; author copy SSRN 3994319) compares two ways of learning those preferences. Under A-Learning ("asking") the buyer sends an unverifiable, costless message about its type and the seller then designs the product. Under O-Learning ("observing") the buyer itself proposes the quality it wants, and the seller accepts or rejects the proposal. In both, the price is set afterwards by bargaining in which the seller makes the take-it-or-leave-it offer with probability γ\gammaγ.

Customization works only if buyer types are revealed in equilibrium. The paper shows that each approach admits a separating equilibrium exactly when the buyers are heterogeneous enough: the ratio θH/θL\theta_H/\theta_LθH​/θL​ of the two types' quality preferences must exceed a critical value, Δ\DeltaΔ under A-Learning (Proposition 1) and Λ\LambdaΛ under O-Learning (Proposition 3). Which approach makes customization easier to sustain is then a comparison of two explicit numbers. Proposition 7 answers it, and its answer depends only on the seller's bargaining power and the two cost coefficients. This is the question a manager choosing between surveys and interviews (asking) and design-it-yourself tools (observing) faces in the model.

Setting

A model is a tuple of real numbers (θH,θL,α,γ,k,s)(\theta_H,\theta_L,\alpha,\gamma,k,s)(θH​,θL​,α,γ,k,s):

  • θH\theta_HθH​ and θL\theta_LθL​ are the quality preferences of the high and the low buyer type; a buyer of type θ\thetaθ buying quality q≥0q\ge0q≥0 at price ppp gets θq−p\theta q-pθq−p;
  • α\alphaα is the prior share of high-type buyers;
  • γ\gammaγ is the seller's bargaining power, the probability that the seller (rather than the buyer) makes the take-it-or-leave-it price offer;
  • kkk is the production-cost coefficient (a product of quality qqq costs kq2kq^2kq2) and sss is the selling-cost coefficient (selling it costs sq2sq^2sq2).

The paper's standing assumptions (§2, pp. 5–6) are

θH>θL>0,α∈(0,1),γ∈(0,1),k>0,s>0.\theta_H>\theta_L>0,\qquad \alpha\in(0,1),\qquad \gamma\in(0,1),\qquad k>0,\qquad s>0 .θH​>θL​>0,α∈(0,1),γ∈(0,1),k>0,s>0.

The A-Learning thresholds (Proposition 1, p. 12, and p. 13) are

ΔH=γ[2s+(1+γ)k](1−γ)(2s+γk),ΔL=2s+γkγk,Δ=max⁡{ΔH,ΔL}.\Delta_H=\frac{\gamma[2s+(1+\gamma)k]}{(1-\gamma)(2s+\gamma k)},\qquad \Delta_L=\frac{2s+\gamma k}{\gamma k},\qquad \Delta=\max\{\Delta_H,\Delta_L\}.ΔH​=(1−γ)(2s+γk)γ[2s+(1+γ)k]​,ΔL​=γk2s+γk​,Δ=max{ΔH​,ΔL​}.

ΔH\Delta_HΔH​ is the ratio above which the high type does not gain by claiming to be low, and ΔL\Delta_LΔL​ the ratio above which the low type does not gain by claiming to be high.

The O-Learning thresholds (Proposition 3, p. 17) are

ΛH1=γ(s+k)(1−γ)s,ΛH2=1+γ1−γ,ΛL=sγk,Λ=max⁡{min⁡{ΛH1,ΛH2},ΛL}.\Lambda_{H1}=\frac{\gamma(s+k)}{(1-\gamma)s},\qquad \Lambda_{H2}=\frac{1+\gamma}{1-\gamma},\qquad \Lambda_L=\frac{s}{\gamma k},\qquad \Lambda=\max\{\min\{\Lambda_{H1},\Lambda_{H2}\},\Lambda_L\}.ΛH1​=(1−γ)sγ(s+k)​,ΛH2​=1−γ1+γ​,ΛL​=γks​,Λ=max{min{ΛH1​,ΛH2​},ΛL​}.

ΛH1\Lambda_{H1}ΛH1​ and ΛH2\Lambda_{H2}ΛH2​ are the high type's thresholds in the two regimes γ≤s/k\gamma\le s/kγ≤s/k (seller acceptance binds) and γ≥s/k\gamma\ge s/kγ≥s/k (it does not); ΛL\Lambda_LΛL​ is the low type's.

Formalization targets

Goal: Proposition 7 (p. 22)

Δ>Λ⟺γ<max⁡{2s2s+k, s2+4sk−s2k},\Delta>\Lambda\quad\Longleftrightarrow\quad\gamma<\max\Big\{\frac{2s}{2s+k},\ \frac{\sqrt{s^2+4sk}-s}{2k}\Big\},Δ>Λ⟺γ<max{2s+k2s​, 2ks2+4sk​−s​},

for every model satisfying the standing assumptions. The paper phrases this as "the critical value of θH/θL\theta_H/\theta_LθH​/θL​ to sustain the separating equilibrium is larger under the A-Learning customization than under the O-Learning customization (i.e., Δ>Λ\Delta>\LambdaΔ>Λ)"; the parenthetical fixes the statement as a comparison of the two printed thresholds.

Milestones (Appendix, Proof of Proposition 7, p. 29)

  1. ΔH<ΛH1\Delta_H<\Lambda_{H1}ΔH​<ΛH1​;
  2. ΔH<ΛH2\Delta_H<\Lambda_{H2}ΔH​<ΛH2​;
  3. ΔL>ΛL\Delta_L>\Lambda_LΔL​>ΛL​;
  4. Δ>Λ  ⟺  ΔL>min⁡{ΛH1,ΛH2}\Delta>\Lambda\iff\Delta_L>\min\{\Lambda_{H1},\Lambda_{H2}\}Δ>Λ⟺ΔL​>min{ΛH1​,ΛH2​}.

Significance

The result. Proposition 7 says that neither learning approach dominates the other. When the seller's bargaining power is low, A-Learning requires more heterogeneous buyers than O-Learning, so empowering buyers to design their own products sustains customization over a larger range of markets; when the seller is powerful, the order reverses. Milestones 1–3 carry the paper's economic reading: the low type's incentive to reveal itself is weaker under A-Learning (ΔL>ΛL\Delta_L>\Lambda_LΔL​>ΛL​), the high type's is stronger (ΔH<min⁡{ΛH1,ΛH2}\Delta_H<\min\{\Lambda_{H1},\Lambda_{H2}\}ΔH​<min{ΛH1​,ΛH2​}), and the comparison is decided by which effect dominates. The cutoff on γ\gammaγ is explicit in sss and kkk, which is what makes the comparison usable for comparative statics.

Formalizing it. The result is proved in the paper, in a short Appendix argument (p. 29); it has not been machine-checked. A formal proof pins down that the reduction is correct for every parameter value allowed by the standing assumptions, including the boundary cases γ=s/k\gamma=s/kγ=s/k (where ΛH1=ΛH2\Lambda_{H1}=\Lambda_{H2}ΛH1​=ΛH2​) and the case where the two candidate cutoffs coincide. Together with the companion missions of this series, which formalize Propositions 1 and 3 as statements about the equilibria of the two games, it gives a fully checked version of the paper's comparison of the two approaches.

Difficulty

Both critical values are nested maxima and minima of rational functions of (γ,k,s)(\gamma,k,s)(γ,k,s), and which term attains each maximum or minimum changes across the parameter space, in particular at γ=s/k\gamma=s/kγ=s/k, where ΛH1\Lambda_{H1}ΛH1​ and ΛH2\Lambda_{H2}ΛH2​ exchange order. A direct case split on the attaining terms therefore produces many cases, several of which turn on sign conditions that hold only under the standing assumptions. The cutoff on the right-hand side is a maximum of two expressions of different kinds, one rational and one involving s2+4sk\sqrt{s^2+4sk}s2+4sk​, and neither of them dominates the other for all (k,s)(k,s)(k,s), so neither can be dropped. Strictness must be tracked throughout, since both sides of the equivalence are strict and the boundary Δ=Λ\Delta=\LambdaΔ=Λ is attained.

Formalization scope

All objects live in the namespace CustomerVoice.Thresholds. A structure Model holds the six real primitives, Model.Standing is the conjunction of the standing assumptions, and Model.DeltaH, DeltaL, Delta, LambdaH1, LambdaH2, LambdaL, Lambda are the printed closed-form expressions, with max⁡\maxmax and min⁡\minmin on R\mathbb RR and the square root as Real.sqrt. Every theorem takes a model and the hypothesis M.Standing; no other hypothesis is added. Only γ\gammaγ, kkk and sss enter the thresholds; θH\theta_HθH​, θL\theta_LθL​ and α\alphaα are carried so that the model is the paper's. Under the standing assumptions all denominators are positive, so Lean's convention x/0=0x/0=0x/0=0 is never used.

The thresholds are defined as the paper prints them. Defining Δ\DeltaΔ or Λ\LambdaΛ as the least type ratio at which an equilibrium exists, replacing them by simplified forms that hold only in a regime (for instance Λ=ΛH2\Lambda=\Lambda_{H2}Λ=ΛH2​ when γ≥s/k\gamma\ge s/kγ≥s/k), replacing the right-hand side of Proposition 7 by an equivalent condition the paper does not print, or proving only one direction of the equivalence, would each be a different statement and is ruled out.

The two games and the equilibrium characterizations behind Δ\DeltaΔ and Λ\LambdaΛ (Propositions 1 and 3) are not part of this mission; they are the goals of missions I and II of this series, and the model is defined again here because draft missions cannot import each other. No library beyond Mathlib's ordered-field and square-root API is needed. Contributions welcome: proofs of the four milestones and the goal, and helper lemmas solving the two quadratic inequalities ΔL>ΛH1\Delta_L>\Lambda_{H1}ΔL​>ΛH1​ and ΔL>ΛH2\Delta_L>\Lambda_{H2}ΔL​>ΛH2​ in γ\gammaγ.

The source is the SSRN author copy of the paper (version of 2023-11-29); all page numbers are its printed pages, and the proof the milestones come from is in its Appendix.

Selected references

  • Liang Guo, The Voice of Customers in Customization, Management Science. doi:10.1287/mnsc.2021.04025. Author copy: SSRN working paper 3994319, version of 2023-11-29, ssrn.com/abstract=3994319.
  • Vincent P. Crawford and Joel Sobel, Strategic Information Transmission, Econometrica 50(6), 1982. doi:10.2307/1913390.
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AnalysisOperations ResearchOptimization·Captain: mikedeng1

A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games 3: The Price of Anarchy Is Locally Lipschitz at Games with Constant Costs or Strictly Increasing C¹ CostsResearch Paper

Motivation

The price of anarchy (PoA) of a nonatomic congestion game is the ratio of the total cost of a Wardrop equilibrium to the minimum total cost. Worst-case bounds on it over whole classes of cost functions are classical (Roughgarden and Tardos, 2002; Correa, Schulz and Stier-Moses, 2004). In practice the demands and cost functions of a traffic model are estimated, never known exactly, so a second question matters as much as the worst case: how much does the PoA of a given game move when its data move?

Wu and Möhring (arXiv:2007.13979v3, published in Mathematics of Operations Research, 2023) answer this with a metric on games that compares demands and cost functions simultaneously. They show that the PoA is continuous, that it is Hölder continuous with exponent 1/21/21/2 near every game whose costs are Lipschitz, and that it is not uniformly Hölder continuous. This mission formalizes their Theorem 12 (§4.3): at two special classes of games, games with constant costs and games with strictly increasing continuously differentiable costs, the exponent improves to 111, so the PoA is locally Lipschitz. The authors motivate the result by the differentiability results of Cominetti, Dose and Scarsini (2020), which suggest Lipschitz behaviour at games whose costs have strictly positive derivatives.

Setting

Fix a finite set AAA of arcs, a finite nonempty set KKK of origin–destination (O/D) pairs, and for each k∈Kk\in Kk∈K a set SkS_kSk​ of at least two paths, each a nonempty set of arcs; every arc lies on some path. A game Γ=(τ,d)\Gamma=(\tau,d)Γ=(τ,d) consists of arc cost functions τa\tau_aτa​, continuous, non-decreasing and non-negative on [0,∞)[0,\infty)[0,∞), and demands dk≥0d_k\ge 0dk​≥0 with total demand T(d)=∑kdk>0T(d)=\sum_k d_k>0T(d)=∑k​dk​>0; moreover τa(x)>0\tau_a(x)>0τa​(x)>0 for x∈(0,T(d)]x\in(0,T(d)]x∈(0,T(d)]. These games form the game space G(G,K,S)\mathcal G(G,K,S)G(G,K,S).

A flow f=(fs)s∈S≥0f=(f_s)_{s\in S}\ge 0f=(fs​)s∈S​≥0 routes each demand, ∑s∈Skfs=dk\sum_{s\in S_k} f_s=d_k∑s∈Sk​​fs​=dk​. The arc flow is fa=∑s∋afsf_a=\sum_{s\ni a} f_sfa​=∑s∋a​fs​, the path cost τs(f)=∑a∈sτa(fa)\tau_s(f)=\sum_{a\in s}\tau_a(f_a)τs​(f)=∑a∈s​τa​(fa​), and the total cost C(Γ,f)=∑afaτa(fa)C(\Gamma,f)=\sum_a f_a\tau_a(f_a)C(Γ,f)=∑a​fa​τa​(fa​). A flow f~\tilde ff~​ is a Wardrop equilibrium (WE) if every used path of a pair is a cheapest path of that pair. The SO cost C∗(Γ)C^*(\Gamma)C∗(Γ) is the minimum total cost, the WE cost C~(Γ)\tilde C(\Gamma)C~(Γ) is the total cost of a WE flow (all WE flows have the same cost), and the PoA is

ρ(Γ)=C~(Γ)C∗(Γ).\rho(\Gamma)=\frac{\tilde C(\Gamma)}{C^*(\Gamma)}.ρ(Γ)=C∗(Γ)C~(Γ)​.

The distance of two games Γ=(τ,d)\Gamma=(\tau,d)Γ=(τ,d) and Γ′=(σ,d′)\Gamma'=(\sigma,d')Γ′=(σ,d′) is

∥Γ−Γ′∥=max⁡{∥d−d′∥∞, max⁡a∈Amax⁡x∈[0,min⁡{T(d),T(d′)}]∣τa(x)−σa(x)∣, ∥τ(T(d))−σ(T(d′))∥∞},\|\Gamma-\Gamma'\|=\max\Big\{\|d-d'\|_\infty,\ \max_{a\in A}\max_{x\in[0,\min\{T(d),T(d')\}]}|\tau_a(x)-\sigma_a(x)|,\ \|\tau(T(d))-\sigma(T(d'))\|_\infty\Big\},∥Γ−Γ′∥=max{∥d−d′∥∞​, a∈Amax​x∈[0,min{T(d),T(d′)}]max​∣τa​(x)−σa​(x)∣, ∥τ(T(d))−σ(T(d′))∥∞​},

which compares cost functions only on the range both games use, plus their values at the respective total demands.

Formalization targets

Goal: Theorem 12

Let Γ=(τ,d)∈G(G,K,S)\Gamma=(\tau,d)\in\mathcal G(G,K,S)Γ=(τ,d)∈G(G,K,S).

  1. If every τa\tau_aτa​ is constant on [0,T(d)][0,T(d)][0,T(d)], or
  2. if every τa\tau_aτa​ is continuously differentiable on [0,T(d)][0,T(d)][0,T(d)] with τa′≥mΓ>0\tau_a'\ge m_\Gamma>0τa′​≥mΓ​>0 there,

then there are ϵΓ>0\epsilon_\Gamma>0ϵΓ​>0 and κΓ>0\kappa_\Gamma>0κΓ​>0 such that

∣ρ(Γ)−ρ(Γ′)∣≤κΓ⋅∥Γ−Γ′∥for all Γ′∈G(G,K,S) with ∥Γ−Γ′∥<ϵΓ.|\rho(\Gamma)-\rho(\Gamma')|\le\kappa_\Gamma\cdot\|\Gamma-\Gamma'\|\qquad\text{for all }\Gamma'\in\mathcal G(G,K,S)\text{ with }\|\Gamma-\Gamma'\|<\epsilon_\Gamma.∣ρ(Γ)−ρ(Γ′)∣≤κΓ​⋅∥Γ−Γ′∥for all Γ′∈G(G,K,S) with ∥Γ−Γ′∥<ϵΓ​.

The goal leaves the constants unspecified; only their existence, depending on Γ\GammaΓ alone, is asserted.

Milestones

  • Proof of Theorem 12a), p. 37. A game whose costs are constant on [0,T(d)][0,T(d)][0,T(d)] has ρ(Γ)=1\rho(\Gamma)=1ρ(Γ)=1.
  • (4.33), p. 37. Near such a game, 0≤ρ(Γ′)−ρ(Γ)≤8 ∣A∣ T(d) (∣K∣+1)C∗(Γ)∥Γ−Γ′∥0\le\rho(\Gamma')-\rho(\Gamma)\le\frac{8\,|A|\,T(d)\,(|K|+1)}{C^*(\Gamma)}\|\Gamma-\Gamma'\|0≤ρ(Γ′)−ρ(Γ)≤C∗(Γ)8∣A∣T(d)(∣K∣+1)​∥Γ−Γ′∥.
  • (4.39), p. 38. For WE flows f~,g~\tilde f,\tilde gf~​,g~​ of two games Γ1=(π1,w)\Gamma_1=(\pi^1,w)Γ1​=(π1,w), Γ2=(π2,w)\Gamma_2=(\pi^2,w)Γ2​=(π2,w) with equal demands,
0≤∑a(πa1(f~a)−πa2(g~a))(g~a−f~a)≤∑a(πa1(g~a)−πa2(f~a))(g~a−f~a)≤2∣A∣ T(w) ∥Γ1−Γ2∥.0\le\sum_a(\pi^1_a(\tilde f_a)-\pi^2_a(\tilde g_a))(\tilde g_a-\tilde f_a)\le\sum_a(\pi^1_a(\tilde g_a)-\pi^2_a(\tilde f_a))(\tilde g_a-\tilde f_a)\le 2|A|\,T(w)\,\|\Gamma_1-\Gamma_2\|.0≤a∑​(πa1​(f~​a​)−πa2​(g~​a​))(g~​a​−f~​a​)≤a∑​(πa1​(g~​a​)−πa2​(f~​a​))(g~​a​−f~​a​)≤2∣A∣T(w)∥Γ1​−Γ2​∥.
  • (4.40), p. 38, first four inequalities. If moreover the costs of Γ1\Gamma_1Γ1​ are C1C^1C1 on [0,T(w)][0,T(w)][0,T(w)] with derivative ≥m>0\ge m>0≥m>0, then
m∑a∣g~a−f~a∣2≤∑a(πa1(g~a)−πa1(f~a))(g~a−f~a)≤∑a(πa1(g~a)−πa2(g~a))(g~a−f~a)≤∥Γ1−Γ2∥∑a∣g~a−f~a∣.m\sum_a|\tilde g_a-\tilde f_a|^2\le\sum_a(\pi^1_a(\tilde g_a)-\pi^1_a(\tilde f_a))(\tilde g_a-\tilde f_a)\le\sum_a(\pi^1_a(\tilde g_a)-\pi^2_a(\tilde g_a))(\tilde g_a-\tilde f_a)\le\|\Gamma_1-\Gamma_2\|\sum_a|\tilde g_a-\tilde f_a|.ma∑​∣g~​a​−f~​a​∣2≤a∑​(πa1​(g~​a​)−πa1​(f~​a​))(g~​a​−f~​a​)≤a∑​(πa1​(g~​a​)−πa2​(g~​a​))(g~​a​−f~​a​)≤∥Γ1​−Γ2​∥a∑​∣g~​a​−f~​a​∣.

Significance

At a general game with Lipschitz costs the PoA is only Hölder continuous with exponent 1/21/21/2 in this metric, and the paper shows that no exponent works uniformly over the game space. Theorem 12 identifies two natural classes of games at which the sensitivity is linear: constant costs (the PoA equals 111 and grows at most linearly under perturbation) and strictly increasing C1C^1C1 costs, which include affine costs with positive slopes. For these games an estimation error of size δ\deltaδ in demands and costs changes the PoA by O(δ)O(\delta)O(δ).

The result is proved in the paper; it is not formalized anywhere. A complete development would also provide machine-checked equilibrium-comparison estimates between two games of one demand slice ((4.39)–(4.40)), which are reusable for any stability analysis of Wardrop equilibria. The paper's explicit constants in (4.41)–(4.46) are off by a factor ∣A∣\sqrt{|A|}∣A∣​ (the last step of (4.40) uses ∑a∣xa∣≤∑axa2\sum_a|x_a|\le\sqrt{\sum_a x_a^2}∑a​∣xa​∣≤∑a​xa2​​); the existential Theorem 12 is unaffected, and a formalization with correct explicit constants is a welcome addition.

Difficulty

The PoA is a ratio of two optimal values, and the perturbed game Γ′\Gamma'Γ′ may change the demand vector and the costs at once, including the costs on (T(d),T(d′)](T(d),T(d')](T(d),T(d′)], which Γ\GammaΓ's hypotheses do not control. A direct comparison of Γ\GammaΓ and Γ′\Gamma'Γ′ therefore fails: the WE flows live in different feasible sets, and the hypotheses on Γ\GammaΓ say nothing beyond T(d)T(d)T(d). The general Hölder-1/21/21/2 argument loses a square root exactly where it bounds the distance between the arc flows of the two equilibria through an approximate-equilibrium estimate; obtaining exponent 111 requires an estimate in which the flow difference enters linearly, and this is where strict monotonicity of the costs is needed. Constant costs are degenerate in the opposite direction: the WE is far from unique, and only costs, not flows, can be compared.

Formalization scope

The model follows §2–§3.2 of the paper and reuses the published definition KellyStochasticNetworks_Wardrop for arc flows, feasibility and the Wardrop condition. Paths are nonempty 0/10/10/1 incidence columns (a generalization of loop-free paths that the proofs do not use); KKK is nonempty and Condition 1 is standing (∣Sk∣≥2|S_k|\ge 2∣Sk​∣≥2, every arc on a path). Costs are functions R→R\mathbb R\to\mathbb RR→R constrained on [0,∞)[0,\infty)[0,∞) only. C∗C^*C∗ is an infimum over all flows, C~\tilde CC~ a supremum over WE flows, ρ=C~/C∗\rho=\tilde C/C^*ρ=C~/C∗; the distance is (3.3) with the sup norm on demand and endpoint vectors and a supremum over the compact set A×[0,min⁡{T(d),T(d′)}]A\times[0,\min\{T(d),T(d')\}]A×[0,min{T(d),T(d′)}]. The derivative in Theorem 12b) is derivWithin on [0,T(d)][0,T(d)][0,T(d)], one-sided at the endpoints, and C1C^1C1 is ContDiffOn ℝ 1 on that interval.

Every statement quantifies over games in the game space only: off it, ρ\rhoρ would be a junk ratio such as 0/0=00/0=00/0=0. The paper prints the conclusions of Theorem 12 and (4.33) with a strict inequality, which fails at Γ′=Γ\Gamma'=\GammaΓ′=Γ; the non-strict form is posed, and no hypothesis Γ′≠Γ\Gamma'\neq\GammaΓ′=Γ is added (distinct games can have distance 000). Milestones (4.39) and (4.40) are posed for two arbitrary games of one demand slice, the general form of the paper's step for its auxiliary game.

A complete development needs existence of SO and WE flows on the game space, the variational characterization of Wardrop equilibria, the mean value theorem on a closed interval with one-sided derivatives, and continuity of C∗C^*C∗ in the metric; contributions of any of these as separate lemmas are welcome. The source is the arXiv preprint v3; the published Mathematics of Operations Research version is not the cited artifact.

Selected references

  • Z. Wu, R. H. Möhring, A sensitivity analysis of the price of anarchy in non-atomic congestion games, Mathematics of Operations Research 48(3), 2023; cited as arXiv:2007.13979v3, 2021. https://arxiv.org/abs/2007.13979v3
  • T. Roughgarden, É. Tardos, How bad is selfish routing?, Journal of the ACM 49(2), 2002. https://doi.org/10.1145/506147.506153
  • J. R. Correa, A. S. Schulz, N. E. Stier-Moses, Selfish routing in capacitated networks, Mathematics of Operations Research 29(4), 2004. https://doi.org/10.1287/moor.1040.0098
  • R. Cominetti, V. Dose, M. Scarsini, The price of anarchy in routing games as a function of the demand, arXiv:1907.10101v2, 2020. https://arxiv.org/abs/1907.10101
  • J. G. Wardrop, Some theoretical aspects of road traffic research, Proceedings of the Institution of Civil Engineers 1(3), 1952. https://doi.org/10.1680/ipeds.1952.11259
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AnalysisOperations ResearchOptimization·Captain: mikedeng1

A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games 1: The Price of Anarchy Is Hölder Continuous with Exponent 1/2 at Every Game with Costs Lipschitz on [0, T(d)]Research Paper

Motivation

The price of anarchy (PoA) of a nonatomic congestion game is the ratio of the total cost of a Wardrop equilibrium to the minimum possible total cost. It quantifies how much selfish routing loses compared with central coordination, and it has been studied intensively since Koutsoupias and Papadimitriou (1999) and Roughgarden and Tardos (2002), mostly through worst-case bounds over classes of cost functions.

Worst-case bounds say nothing about how the PoA of one particular network behaves when its data change. In transport applications both the cost functions (capacities, tolls, travel-time models) and the demands are estimated, so the PoA is only useful if small errors in the data cause small errors in the PoA. Wu and Möhring (arXiv:2007.13979, published in Mathematics of Operations Research, 2023) study this sensitivity question in a setting where cost functions and demands change simultaneously. Earlier sensitivity results changed only the demands, with the cost functions fixed: Englert, Franke and Olbrich (2010) bounded the growth of the PoA of a single-O/D network with polynomial costs of degree at most β\betaβ by a factor (1+ϵ)β(1+\epsilon)^\beta(1+ϵ)β when the demand grows by a factor 1+ϵ1+\epsilon1+ϵ; Takalloo and Kwon (2020) extended this to several O/D pairs whose demands are scaled together; and Cominetti, Dose and Scarsini (arXiv:1907.10101) studied differentiability of the PoA as a function of the demand of a single O/D pair. The main theorem of the paper, Theorem 9, is the subject of this mission.

Setting

A network consists of a finite set AAA of arcs, a finite non-empty set K\mathcal KK of origin–destination (O/D) pairs, and for every k∈Kk \in \mathcal Kk∈K a non-empty set Sk\mathcal S_kSk​ of paths; each path is a non-empty set of arcs. From §3.1 onward the paper also assumes every arc lies on some path and every Sk\mathcal S_kSk​ has at least two paths (Condition 1).

A game Γ=(τ,d)\Gamma = (\tau, d)Γ=(τ,d) on the network consists of cost functions τa:[0,∞)→[0,∞)\tau_a : [0,\infty) \to [0,\infty)τa​:[0,∞)→[0,∞), one per arc, that are continuous and non-decreasing, and demands dk≥0d_k \ge 0dk​≥0, one per O/D pair. The total demand is T(d)=∑kdkT(d) = \sum_k d_kT(d)=∑k​dk​. The game space G(G,K,S)\mathcal G(G,\mathcal K,\mathcal S)G(G,K,S) consists of the games with T(d)>0T(d) > 0T(d)>0 and τa(x)>0\tau_a(x) > 0τa​(x)>0 for all x∈(0,T(d)]x \in (0, T(d)]x∈(0,T(d)].

A flow f=(fs)f = (f_s)f=(fs​) assigns a non-negative amount to every path, with ∑s∈Skfs=dk\sum_{s\in\mathcal S_k} f_s = d_k∑s∈Sk​​fs​=dk​. Its arc flows are fa=∑s∋afsf_a = \sum_{s \ni a} f_sfa​=∑s∋a​fs​, its path costs τs(f)=∑a∈sτa(fa)\tau_s(f) = \sum_{a\in s}\tau_a(f_a)τs​(f)=∑a∈s​τa​(fa​), and its total cost

C(Γ,f)=∑a∈Afa τa(fa).C(\Gamma, f) = \sum_{a\in A} f_a\,\tau_a(f_a).C(Γ,f)=a∈A∑​fa​τa​(fa​).

A Wardrop equilibrium (WE) is a flow in which every used path of a pair is a cheapest path of that pair. The SO cost C∗(Γ)\mathcal C^*(\Gamma)C∗(Γ) is the minimum total cost over all flows, the WE cost C~(Γ)\tilde{\mathcal C}(\Gamma)C~(Γ) is the total cost of a WE flow (all WE flows have the same cost), and

ρ(Γ)=C~(Γ)C∗(Γ).\rho(\Gamma) = \frac{\tilde{\mathcal C}(\Gamma)}{\mathcal C^*(\Gamma)}.ρ(Γ)=C∗(Γ)C~(Γ)​.

Games are compared by the distance

∥Γ−Γ′∥=max⁡{∥d−d′∥∞, max⁡a∈Amax⁡x∈[0,min⁡{T(d),T(d′)}]∣τa(x)−σa(x)∣, ∥τ(T(d))−σ(T(d′))∥∞}\|\Gamma - \Gamma'\| = \max\Big\{\|d-d'\|_\infty,\ \max_{a\in A}\max_{x\in[0,\min\{T(d),T(d')\}]}|\tau_a(x) - \sigma_a(x)|,\ \|\tau(T(d)) - \sigma(T(d'))\|_\infty\Big\}∥Γ−Γ′∥=max{∥d−d′∥∞​, a∈Amax​x∈[0,min{T(d),T(d′)}]max​∣τa​(x)−σa​(x)∣, ∥τ(T(d))−σ(T(d′))∥∞​}

for Γ=(τ,d)\Gamma = (\tau, d)Γ=(τ,d) and Γ′=(σ,d′)\Gamma' = (\sigma, d')Γ′=(σ,d′). It compares cost functions only on the range of flow values both games can produce, plus the values at the respective total demands. A function hhh is Lipschitz continuous on [0,T][0,T][0,T] with constant MMM if ∣h(x)−h(y)∣≤M∣x−y∣|h(x) - h(y)| \le M|x-y|∣h(x)−h(y)∣≤M∣x−y∣ for all x,y∈[0,T]x, y \in [0,T]x,y∈[0,T].

Formalization targets

Goal: Theorem 9 (p. 26)

Let Γ=(τ,d)\Gamma = (\tau, d)Γ=(τ,d) be a game of the game space whose cost functions are Lipschitz continuous on [0,T(d)][0, T(d)][0,T(d)]. Then there are ϵΓ>0\epsilon_\Gamma > 0ϵΓ​>0 and κΓ>0\kappa_\Gamma > 0κΓ​>0, depending only on Γ\GammaΓ, such that

∣ρ(Γ)−ρ(Γ′)∣≤κΓ ∥Γ−Γ′∥1/2for every game Γ′ of the game space with ∥Γ−Γ′∥<ϵΓ.|\rho(\Gamma) - \rho(\Gamma')| \le \kappa_\Gamma\,\|\Gamma - \Gamma'\|^{1/2}\quad\text{for every game } \Gamma' \text{ of the game space with } \|\Gamma - \Gamma'\| < \epsilon_\Gamma.∣ρ(Γ)−ρ(Γ′)∣≤κΓ​∥Γ−Γ′∥1/2for every game Γ′ of the game space with ∥Γ−Γ′∥<ϵΓ​.

The goal fixes the exponent 1/21/21/2 and leaves the radius and the constant existential, which is the form the paper claims.

Milestones

  1. Lemma 1a)–c) (p. 13): properties of ϵ\epsilonϵ-approximate WE flows, ending with
∣C(Γ,f)−C(Γ,f~)∣≤∣A∣Mϵ T(d)+ϵ|C(\Gamma, f) - C(\Gamma, \tilde f)| \le |A|\sqrt{M\epsilon}\,T(d) + \epsilon∣C(Γ,f)−C(Γ,f~​)∣≤∣A∣Mϵ​T(d)+ϵ

for an ϵ\epsilonϵ-approximate WE flow fff and a WE flow f~\tilde ff~​ when all costs are MMM-Lipschitz on [0,T(d)][0,T(d)][0,T(d)]. 2. Lemma 10a)–d) (p. 27): on a demand slice (games with a common demand vector www), C∗\mathcal C^*C∗ is Lipschitz, WE flows of one game are ∣A∣ T(w) ∥Γ1−Γ2∥|A|\,T(w)\,\|\Gamma_1-\Gamma_2\|∣A∣T(w)∥Γ1​−Γ2​∥-approximate WE flows of the other, and C~\tilde{\mathcal C}C~ and ρ\rhoρ are Hölder with exponent 1/21/21/2 with explicit constants. 3. Lemma 11a)–c) (p. 31): on a cost slice (games with a common cost vector and T(w′)≤T(w)T(w') \le T(w)T(w′)≤T(w)), explicit Hölder bounds of exponent 1/21/21/2 for C~\tilde{\mathcal C}C~ and ρ\rhoρ and a Lipschitz bound for C∗\mathcal C^*C∗.

Significance

Theorem 9 is the first pointwise Hölder continuity result for the PoA on the whole game space, with demands and costs perturbed together. Its hypothesis is mild (Lipschitz costs on a compact interval, which covers polynomial, BPR-type and piecewise linear costs), and such games are dense in the game space. Together with Theorem 8 of the same paper, which shows that no uniform Hölder bound exists, it describes exactly what kind of stability the PoA has: local, with a constant depending on the game, and exponent 1/21/21/2 in general. The explicit constants of Lemmas 10 and 11 give computable error bounds for the PoA of a network whose data are known only approximately.

The result is proved in the paper; no machine-checked proof exists. This mission formalizes the statement and the explicit slice estimates the proof rests on. Lemma 1 is a self-contained statement about approximate Wardrop equilibria that is useful well beyond this paper, for instance for analysing iterative traffic-assignment algorithms, which only ever produce approximate equilibria.

Difficulty

The obvious approach compares an equilibrium of Γ\GammaΓ with an equilibrium of Γ′\Gamma'Γ′ directly. This fails because the two games have different demand vectors, so their flows live in different polytopes: an equilibrium of one game is not even a flow of the other. The paper separates the perturbation into a change of costs at fixed demand and a change of demand at fixed costs, through an auxiliary game, and each half needs its own argument. On a demand slice an equilibrium of one game is only an approximate equilibrium of the other, and the passage from an approximate equilibrium to its cost loses a square root (Lemma 1c), which is tight by Example 2). On a cost slice the demand has to be removed path by path from an equilibrium while keeping it an equilibrium of a shifted game. Finally, the constants of the slice estimates depend on the auxiliary game, and they must be controlled uniformly near Γ\GammaΓ.

Formalization scope

The Lean development fixes the following conventions.

  • The network is a structure with ∣A∣|A|∣A∣ arcs, ∣S∣|\mathcal S|∣S∣ paths and ∣K∣|\mathcal K|∣K∣ O/D pairs, a 0/1 arc–path incidence matrix and the map sending a path to its pair. Lemma 1 uses the §2 model assumptions: 0/1 incidence, non-empty paths, K≠∅\mathcal K \neq \emptysetK=∅, and ∣Sk∣≥1|\mathcal S_k| \ge 1∣Sk​∣≥1. The later results add Condition 1 (every arc on a path, ∣Sk∣≥2|\mathcal S_k| \ge 2∣Sk​∣≥2), as assumed from §3.1. Paths are arbitrary non-empty 0/1 columns, not necessarily loop-free paths of a digraph; the results do not use loop-freeness.
  • Cost functions are maps R→R\mathbb R \to \mathbb RR→R required to be continuous, non-decreasing and non-negative on [0,∞)[0,\infty)[0,∞) only.
  • Arc flows, Wardrop equilibria (2.1) and the potential (2.6) come from the published definition KellyStochasticNetworks_Wardrop. ϵ\epsilonϵ-approximate WE flows follow (2.7) in arc form. The total cost uses the arc form, which equals the path form for 0/1 incidence.
  • C∗\mathcal C^*C∗ is the infimum of costs over flows, C~\tilde{\mathcal C}C~ the supremum of costs over WE flows, ρ\rhoρ their quotient. The middle term of the distance is the supremum of the image of the compact set A×[0,min⁡{T(d),T(d′)}]A\times[0,\min\{T(d),T(d')\}]A×[0,min{T(d),T(d′)}], and ∥⋅∥∞\|\cdot\|_\infty∥⋅∥∞​ is the sup norm.
  • Every statement about ρ\rhoρ, C∗\mathcal C^*C∗ or C~\tilde{\mathcal C}C~ quantifies over games of the game space, where ρ\rhoρ is a genuine ratio of positive numbers. Off the game space Lean's division by zero would give ρ=0\rho = 0ρ=0, so quantifying over all pairs (τ,d)(\tau, d)(τ,d) would trivialize the statements; this is ruled out. In the goal, ϵΓ\epsilon_\GammaϵΓ​ and κΓ\kappa_\GammaκΓ​ are chosen before Γ′\Gamma'Γ′.
  • Several printed strict inequalities are posed as non-strict, because they fail at Γ′=Γ\Gamma' = \GammaΓ′=Γ or are attained in the paper's own Example 2. In Lemma 11 the printed constants are corrected by a factor ∣K∣|\mathcal K|∣K∣ that the paper's own argument needs; each item's Formalization Note quotes the printed form.

A complete development needs: existence of Wardrop equilibria and uniqueness of their cost on the game space, existence of social optima, the integral inequality (2.9) for monotone costs, positivity of C∗\mathcal C^*C∗ on the game space, and the path-by-path demand-reduction construction of Lemma 11. The existence and uniqueness results and Lemma 1 are reusable in any formalization of selfish routing. Proofs of any milestone are welcome, as are the supporting lemmas above.

The source is the arXiv preprint arXiv:2007.13979v3 (23 Aug 2021); all page and theorem numbers refer to it, not to the published version.

Selected references

  • Z. Wu, R. H. Möhring, A sensitivity analysis of the price of anarchy in non-atomic congestion games, arXiv:2007.13979v3, 2021; Mathematics of Operations Research 48(3), 2023. https://arxiv.org/abs/2007.13979, https://doi.org/10.1287/moor.2022.1292
  • T. Roughgarden, É. Tardos, How bad is selfish routing?, Journal of the ACM 49(2), 2002. https://doi.org/10.1145/506147.506153
  • E. Koutsoupias, C. Papadimitriou, Worst-case equilibria, STACS 1999. https://doi.org/10.1007/3-540-49116-3_38
  • J. G. Wardrop, Some theoretical aspects of road traffic research, Proceedings of the Institution of Civil Engineers 1(3), 1952. https://doi.org/10.1680/ipeds.1952.11259
  • M. Englert, T. Franke, L. Olbrich, Sensitivity of Wardrop equilibria, Theory of Computing Systems 47(1):3–14, 2010.
  • M. Takalloo, C. Kwon, Sensitivity of Wardrop equilibria: revisited, Optimization Letters 14(3):781–796, 2020.
  • R. Cominetti, V. Dose, M. Scarsini, The price of anarchy in routing games as a function of the demand, 2020. https://arxiv.org/abs/1907.10101
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Operations ResearchOptimization·Captain: mikedeng1

A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games 4: The Price of Anarchy Is Not Uniformly Hölder Continuous and No Game Has the Whole Space as a Hölder NeighborhoodResearch Paper

Motivation

The price of anarchy (PoA) of a nonatomic congestion game measures how much total cost is lost when a continuum of selfish users routes traffic instead of a central planner. Worst-case bounds on the PoA over classes of cost functions are classical: 4/34/34/3 for affine costs and Θ(β/ln⁡β)\Theta(\beta/\ln\beta)Θ(β/lnβ) for polynomial costs of degree at most β\betaβ (Roughgarden and Tardos 2002; Roughgarden 2003). Worst-case bounds say nothing about how the PoA of one particular instance reacts when its demands and cost functions are perturbed, which is what matters when traffic data are measured with error or change over time.

Z. Wu and R. H. Möhring (arXiv:2007.13979v3, published in Mathematics of Operations Research, 2023) study this sensitivity through Hölder continuity of the PoA map Γ↦ρ(Γ)\Gamma \mapsto \rho(\Gamma)Γ↦ρ(Γ) on a metric space of games. Earlier work considered changes of the demand alone: Englert et al. (2010), Takalloo and Kwon (2020) and Cominetti et al. (2020), as cited in the paper, fix the cost functions and vary the demand. Wu and Möhring vary both. Their main positive results are local: Hölder continuity with exponent 1/21/21/2 near every game with Lipschitz costs. This mission formalizes their negative result, Theorem 8, which says that no global version of this regularity is possible.

Setting

Fix a network with arcs AAA, a non-empty finite set KKK of origin–destination (O/D) pairs, and for each pair kkk a set SkS_kSk​ of paths, each a non-empty set of arcs, with ∣Sk∣≥2|S_k| \ge 2∣Sk​∣≥2 and every arc on some path (Condition 1). A game Γ=(τ,d)\Gamma = (\tau, d)Γ=(τ,d) consists of cost functions τa\tau_aτa​, continuous, non-decreasing and non-negative on [0,∞)[0,\infty)[0,∞), and demands dk≥0d_k \ge 0dk​≥0 with total demand T(d)=∑kdkT(d) = \sum_k d_kT(d)=∑k​dk​. The game space G(G,K,S)\mathcal G(G,K,S)G(G,K,S) consists of the games with T(d)>0T(d) > 0T(d)>0 and τa(x)>0\tau_a(x) > 0τa​(x)>0 for x∈(0,T(d)]x \in (0, T(d)]x∈(0,T(d)] (Condition 2).

A flow splits each dkd_kdk​ non-negatively over SkS_kSk​; its arc flows are fa=∑s∋afsf_a = \sum_{s \ni a} f_sfa​=∑s∋a​fs​ and its total cost is C(Γ,f)=∑afaτa(fa)C(\Gamma, f) = \sum_a f_a \tau_a(f_a)C(Γ,f)=∑a​fa​τa​(fa​). A Wardrop equilibrium (WE) is a flow in which every used path of a pair has minimal cost among the paths of that pair. With C∗(Γ)C^*(\Gamma)C∗(Γ) the minimum total cost and C~(Γ)\tilde C(\Gamma)C~(Γ) the total cost of a WE flow,

ρ(Γ)=C~(Γ)C∗(Γ).\rho(\Gamma) = \frac{\tilde C(\Gamma)}{C^*(\Gamma)}.ρ(Γ)=C∗(Γ)C~(Γ)​.

The distance of two games Γ=(τ,d)\Gamma = (\tau, d)Γ=(τ,d), Γ′=(σ,d′)\Gamma' = (\sigma, d')Γ′=(σ,d′) is

∥Γ−Γ′∥=max⁡{∥d−d′∥∞, max⁡a, x∈[0,min⁡{T(d),T(d′)}]∣τa(x)−σa(x)∣, ∥τ(T(d))−σ(T(d′))∥∞}.\|\Gamma - \Gamma'\| = \max\Big\{\|d - d'\|_\infty,\ \max_{a,\ x \in [0, \min\{T(d),T(d')\}]} |\tau_a(x) - \sigma_a(x)|,\ \|\tau(T(d)) - \sigma(T(d'))\|_\infty\Big\}.∥Γ−Γ′∥=max{∥d−d′∥∞​, a, x∈[0,min{T(d),T(d′)}]max​∣τa​(x)−σa​(x)∣, ∥τ(T(d))−σ(T(d′))∥∞​}.

The cost normalization Ψυ(τ,d)=(τ/υ,d)\Psi_\upsilon(\tau, d) = (\tau/\upsilon, d)Ψυ​(τ,d)=(τ/υ,d), υ>0\upsilon > 0υ>0, divides all costs by υ\upsilonυ. A γ\gammaγ-neighborhood of Γ\GammaΓ is an open set U∋ΓU \ni \GammaU∋Γ of games on which ∣ρ(Γ)−ρ(Γ′)∣≤ϰΓ∥Γ−Γ′∥γ|\rho(\Gamma) - \rho(\Gamma')| \le \varkappa_\Gamma \|\Gamma - \Gamma'\|^\gamma∣ρ(Γ)−ρ(Γ′)∣≤ϰΓ​∥Γ−Γ′∥γ for some constant ϰΓ>0\varkappa_\Gamma > 0ϰΓ​>0.

Formalization targets

Goal: Theorem 8b)

For every game Γ∈G(G,K,S)\Gamma \in \mathcal G(G,K,S)Γ∈G(G,K,S) and every γ>0\gamma > 0γ>0,

¬ ∃ ϰ>0  ∀Γ′∈G(G,K,S): ∣ρ(Γ)−ρ(Γ′)∣≤ϰ ∥Γ−Γ′∥γ,\neg\,\exists\, \varkappa > 0\ \ \forall \Gamma' \in \mathcal G(G,K,S):\ |\rho(\Gamma) - \rho(\Gamma')| \le \varkappa\, \|\Gamma - \Gamma'\|^\gamma,¬∃ϰ>0  ∀Γ′∈G(G,K,S): ∣ρ(Γ)−ρ(Γ′)∣≤ϰ∥Γ−Γ′∥γ,

that is, the whole game space is never a γ\gammaγ-neighborhood: Hölder continuity of ρ\rhoρ holds at best locally, even with a constant depending on the game.

Milestones

  1. ρ(Ψυ(Γ))=ρ(Γ)\rho(\Psi_\upsilon(\Gamma)) = \rho(\Gamma)ρ(Ψυ​(Γ))=ρ(Γ) for υ>0\upsilon > 0υ>0 (§3.5).
  2. ∥Ψυ(Γ)−Ψυ(Γ′)∥=∥Γ−Γ′∥/υ\|\Psi_\upsilon(\Gamma) - \Psi_\upsilon(\Gamma')\| = \|\Gamma - \Gamma'\|/\upsilon∥Ψυ​(Γ)−Ψυ​(Γ′)∥=∥Γ−Γ′∥/υ when d=d′d = d'd=d′ (3.11).
  3. Some demand vector carries two games with different PoA (p. 24).
  4. Theorem 8a): no γ>0\gamma > 0γ>0, ϰ>0\varkappa > 0ϰ>0 make ρ\rhoρ uniformly Hölder continuous on G(G,K,S)\mathcal G(G,K,S)G(G,K,S).
  5. ρ\rhoρ is unbounded on the demand slice {Γ′:d′=d}\{\Gamma' : d' = d\}{Γ′:d′=d} whenever ddd is supported on a single O/D pair (p. 25, corrected; see below).

Significance

Theorem 8 separates what can be proved about the sensitivity of the PoA from what cannot. Part a) rules out uniform Hölder (in particular Lipschitz) bounds; part b) rules out global bounds even with a game-dependent constant. Together they explain the shape of the paper's positive results (Theorems 9 and 12), which hold on balls around a game with constants that depend on that game.

The result is proved in the paper; no machine-checked version exists. Formalizing it fixes the exact hypotheses under which it holds. Two are not visible on the page: paths must form an antichain (otherwise ρ≡1\rho \equiv 1ρ≡1 is possible), and the unboundedness step of part b) does not hold on every demand slice. The milestones on cost normalizations are reusable for any scale-invariance argument about the PoA.

Difficulty

The invariance and scaling milestones are bookkeeping about suprema and infima. The substance is in the constructions. For 8a), two games with equal demands and different PoA are needed, which requires an explicit game whose Wardrop equilibrium is strictly inefficient on an arbitrary network satisfying Condition 1 and the antichain condition, so the WE cost and the SO cost must be computed or bounded, not just estimated asymptotically.

For 8b), the paper argues that a global Hölder bound makes ρ\rhoρ bounded on the demand slice of Γ\GammaΓ, and that ρ\rhoρ is unbounded there because the slice contains Pigou-like games. The second step fails in general: with several O/D pairs, other pairs can be forced through the arcs that distinguish the paths of every pair, and on such a slice ρ\rhoρ can be bounded (an explicit three-pair network with ρ≤5/2\rho \le 5/2ρ≤5/2 on the slice d=(1,1,1)d = (1,1,1)d=(1,1,1) is recorded in the milestone). The natural repair compares Γ\GammaΓ with games on a different slice, whose demand sits on one pair, and requires bounding the distance between games with different demands as the costs are normalized away.

Formalization scope

Lean represents paths as 0/10/10/1 columns of an arc–path incidence matrix and pairs as a map from paths to pairs, on top of the published KellyStochasticNetworks_Wardrop definitions (arc flows, feasible flows, Wardrop's first principle). The commitments are:

  • the standing assumptions are G1–G2 (non-empty KKK, non-empty paths), 0/10/10/1 incidences and Condition 1;
  • the antichain condition (no path of a pair inside another path of the same pair) is an added hypothesis of every theorem. It holds for loop-free paths of a digraph, which the paper assumes;
  • costs are real functions whose properties are required on [0,∞)[0,\infty)[0,∞) only;
  • C∗C^*C∗ is an infimum over all flows and C~\tilde CC~ a supremum over WE flows. All WE flows have the same cost;
  • the distance uses the sup norm and a supremum over the compact set A×[0,min⁡{T(d),T(d′)}]A \times [0, \min\{T(d),T(d')\}]A×[0,min{T(d),T(d′)}];
  • powers are real powers with γ>0\gamma > 0γ>0.

Every game in every statement ranges over the game space. A formalization quantifying over arbitrary pairs (τ,d)(\tau, d)(τ,d) would be trivial: Lean's 0/0=00/0 = 00/0=0 gives such pairs ρ=0\rho = 0ρ=0, and a junk game next to a real one breaks any Hölder bound for free.

The unboundedness milestone is posed for single-pair demand slices instead of the page's arbitrary slice, because the page's version is false for some multi-pair networks. Its asymptotic rate Θ(β/ln⁡β)\Theta(\beta/\ln\beta)Θ(β/lnβ) is cited by the paper and not posed. Contributions of the two constructions (a strictly inefficient game for 8a, Pigou-type games on one pair for 8b) and of the distance estimates are welcome; related Pigou statements exist as SelfishRouting.Linear.figure_3_pigou (Roughgarden–Tardos).

The source is the arXiv preprint v3; the published MOR version is not the cited artifact.

Selected references

  • Z. Wu, R. H. Möhring, A sensitivity analysis of the price of anarchy in nonatomic congestion games, Mathematics of Operations Research 48(3), 2023; cited as arXiv:2007.13979v3 (2021). https://arxiv.org/abs/2007.13979v3
  • T. Roughgarden, É. Tardos, How bad is selfish routing?, Journal of the ACM 49(2), 2002. https://doi.org/10.1145/506147.506153
  • T. Roughgarden, The price of anarchy is independent of the network topology, Journal of Computer and System Sciences 67(2), 2003. https://doi.org/10.1016/S0022-0000(03)00044-8
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Operations ResearchOptimization·Captain: mikedeng1

A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games 5: For Small Total Demand the Price of Anarchy Exceeds 1 by at Most an Explicit Multiple of the Total DemandResearch Paper

Motivation

The price of anarchy (PoA) of a nonatomic congestion game is the ratio between the total travel cost at a Wardrop equilibrium, where every traveller uses a cheapest route, and the minimum total cost a central planner could achieve. Worst-case bounds on the PoA are classical (Roughgarden and Tardos, 2002), but traffic studies observe that the empirical PoA is close to 111 both in light and in heavy traffic (Youn, Gastner and Jeong, 2008; O'Hare, Connors and Watling, 2016). This raises the question of how the PoA of a fixed network with fixed cost functions behaves as the demand varies.

For decreasing demand the literature had one convergence result: for polynomial costs, Colini-Baldeschi, Cominetti, Mertikopoulos and Scarsini (2020) show ρ→1\rho \to 1ρ→1 when the total demand tends to 000 with fixed demand proportions, at rate O(T(d))O(T(d))O(T(d)). Wu and Möhring (2021) obtain a rate for arbitrary cost functions that are strictly positive and Lipschitz near 000, with no condition on the demand proportions, as a corollary of their sensitivity analysis of the PoA. This mission formalizes that corollary, Corollary 5.1 of arXiv:2007.13979v3.

Setting

A structure consists of a finite set AAA of arcs, a finite nonempty set K\mathcal KK of origin–destination (O/D) pairs, and for every pair kkk a set Sk\mathcal S_kSk​ of at least two paths, each a nonempty set of arcs; every arc lies on some path. A game Γ=(τ,d)\Gamma = (\tau, d)Γ=(τ,d) is a vector of arc cost functions τa:[0,∞)→[0,∞)\tau_a : [0,\infty) \to [0,\infty)τa​:[0,∞)→[0,∞), continuous and non-decreasing, together with demands dk≥0d_k \ge 0dk​≥0 of total T(d)=∑kdkT(d) = \sum_k d_kT(d)=∑k​dk​. The game space G(G,K,S)\mathcal G(G, \mathcal K, \mathcal S)G(G,K,S) consists of the games with T(d)>0T(d) > 0T(d)>0 and τa(x)>0\tau_a(x) > 0τa​(x)>0 on (0,T(d)](0, T(d)](0,T(d)].

A flow f=(fs)f = (f_s)f=(fs​) routes dkd_kdk​ over Sk\mathcal S_kSk​ with fs≥0f_s \ge 0fs​≥0. Arc flows are fa=∑s∋afsf_a = \sum_{s \ni a} f_sfa​=∑s∋a​fs​ and the total cost is C(Γ,f)=∑afaτa(fa)C(\Gamma, f) = \sum_a f_a \tau_a(f_a)C(Γ,f)=∑a​fa​τa​(fa​). A flow is a Wardrop equilibrium if every used path is a cheapest path of its pair. With C∗(Γ)\mathcal C^*(\Gamma)C∗(Γ) the minimum total cost and C~(Γ)\tilde{\mathcal C}(\Gamma)C~(Γ) the cost of a Wardrop equilibrium (all equilibria have the same cost),

ρ(Γ)=C~(Γ)C∗(Γ)≥1.\rho(\Gamma) = \frac{\tilde{\mathcal C}(\Gamma)}{\mathcal C^*(\Gamma)} \ge 1.ρ(Γ)=C∗(Γ)C~(Γ)​≥1.

Games are compared by the distance (3.3),

∥Γ−Γ′∥=max⁡{∥d−d′∥∞, max⁡a, x∈[0,min⁡{T(d),T(d′)}]∣τa(x)−σa(x)∣, ∥τ(T(d))−σ(T(d′))∥∞},\|\Gamma - \Gamma'\| = \max\Big\{\|d - d'\|_\infty,\ \max_{a,\ x \in [0, \min\{T(d), T(d')\}]} |\tau_a(x) - \sigma_a(x)|,\ \|\tau(T(d)) - \sigma(T(d'))\|_\infty\Big\},∥Γ−Γ′∥=max{∥d−d′∥∞​, a, x∈[0,min{T(d),T(d′)}]max​∣τa​(x)−σa​(x)∣, ∥τ(T(d))−σ(T(d′))∥∞​},

and the demand normalization Λυ(τ,d)=(τ∘υ,d/υ)\Lambda_\upsilon(\tau, d) = (\tau \circ \upsilon, d/\upsilon)Λυ​(τ,d)=(τ∘υ,d/υ), with (τa∘υ)(x)=τa(xυ)(\tau_a \circ \upsilon)(x) = \tau_a(x\upsilon)(τa​∘υ)(x)=τa​(xυ), rescales a game to a different total demand. The cost slice of τ\tauτ is the set of games whose costs agree with τ\tauτ on [0,T(d)][0, T(d)][0,T(d)].

Formalization targets

Goal: Corollary 5.1 (p. 43)

Let the costs τa\tau_aτa​ be strictly positive on [0,∞)[0,\infty)[0,∞) and Lipschitz on [0,b][0, b][0,b] with constant Mτ>0M_\tau > 0Mτ​>0, and let τmin⁡(0)=min⁡aτa(0)\tau_{\min}(0) = \min_a \tau_a(0)τmin​(0)=mina​τa​(0). There is δ>0\delta > 0δ>0 such that for every demand vector d≥0d \ge 0d≥0 with 0<T(d)<δ0 < T(d) < \delta0<T(d)<δ,

ρ(τ,d)≤1+8⋅∣A∣⋅(∣K∣+1)τmin⁡(0)⋅Mτ⋅T(d).\rho(\tau, d) \le 1 + \frac{8 \cdot |A| \cdot (|\mathcal K| + 1)}{\tau_{\min}(0)} \cdot M_\tau \cdot T(d).ρ(τ,d)≤1+τmin​(0)8⋅∣A∣⋅(∣K∣+1)​⋅Mτ​⋅T(d).

Milestones

  1. §3.5, p. 22. Λυ\Lambda_\upsilonΛυ​ preserves the game space, maps WE and SO flows to WE and SO flows (divided by υ\upsilonυ), scales the total cost by 1/υ1/\upsilon1/υ, and leaves ρ\rhoρ unchanged.
  2. p. 43, first display. With σa≡τa(0)\sigma_a \equiv \tau_a(0)σa​≡τa​(0) and Γ′=(σ,d/T(d))\Gamma' = (\sigma, d/T(d))Γ′=(σ,d/T(d)): ∥Γ′−ΛT(d)(τ,d)∥=max⁡a∣τa(T(d))−τa(0)∣≤MτT(d)\|\Gamma' - \Lambda_{T(d)}(\tau, d)\| = \max_a |\tau_a(T(d)) - \tau_a(0)| \le M_\tau T(d)∥Γ′−ΛT(d)​(τ,d)∥=maxa​∣τa​(T(d))−τa​(0)∣≤Mτ​T(d) when T(d)≤bT(d) \le bT(d)≤b.
  3. p. 43. C∗(Γ′)≥τmin⁡(0)\mathcal C^*(\Gamma') \ge \tau_{\min}(0)C∗(Γ′)≥τmin​(0) for every ddd.
  4. p. 43, second display. For T(d)T(d)T(d) below a threshold independent of ddd: ρ(Γ′)=1\rho(\Gamma') = 1ρ(Γ′)=1 and ∣ρ(ΛT(d)(τ,d))−ρ(Γ′)∣≤8∣A∣(∣K∣+1)MτT(d)/τmin⁡(0)|\rho(\Lambda_{T(d)}(\tau,d)) - \rho(\Gamma')| \le 8|A|(|\mathcal K|+1) M_\tau T(d)/\tau_{\min}(0)∣ρ(ΛT(d)​(τ,d))−ρ(Γ′)∣≤8∣A∣(∣K∣+1)Mτ​T(d)/τmin​(0).

Significance

The corollary gives a rate of convergence of the PoA to 111 in light traffic for every cost vector that is strictly positive at 000 and Lipschitz near 000, with an explicit constant depending only on the number of arcs, the number of O/D pairs, the Lipschitz constant and the free-flow costs τa(0)\tau_a(0)τa​(0). It removes the fixed-proportion condition on the demands needed in the earlier polynomial result, and it combines with the heavy-traffic results for regularly varying costs to show that the PoA is bounded on whole cost slices (p. 43).

The result is proved in the paper, in a few lines on top of the local Lipschitz estimate (4.33) of Theorem 12a). To our knowledge it has no machine-checked proof. Formalizing it requires a Lean model of nonatomic congestion games with demand normalizations and the metric (3.3), together with the comparison between a game of total demand 111 and the constant-cost game at the same demand, which is reusable for other light-traffic statements.

Difficulty

A direct bound ρ(τ,d)≤1+c T(d)\rho(\tau, d) \le 1 + c\,T(d)ρ(τ,d)≤1+cT(d) cannot simply be read off as T(d)→0T(d) \to 0T(d)→0: the costs C∗\mathcal C^*C∗ and C~\tilde{\mathcal C}C~ both tend to 000 with the demand, so their ratio is a quotient of two vanishing quantities, and an additive estimate on each cost says nothing about the ratio. The difficulty is to obtain a bound in which neither the threshold on T(d)T(d)T(d) nor the constant depends on the demand vector ddd, including the proportions dk/T(d)d_k/T(d)dk​/T(d), which may vary arbitrarily, and some of which may vanish. Any argument whose constants depend on the particular game near which it works (as a pointwise Hölder constant does) gives only a pointwise statement, not the uniform one asserted here.

Formalization scope

The Lean development lives in the namespace SensitivityPoA.SmallDemand and builds on the published definition KellyStochasticNetworks_Wardrop (flows, arc flows, Wardrop's first principle). Conventions:

  • The structure is a 0/1 arc–route incidence matrix with a map from routes to O/D pairs. Standing assumptions (disclosed): every route contains an arc, K\mathcal KK is nonempty, and Condition 1 (every arc on some route, ∣Sk∣≥2|\mathcal S_k| \ge 2∣Sk​∣≥2). Routes are arbitrary 0/1 columns, a generalization of loop-free paths.
  • Cost functions are functions R→R\mathbb R \to \mathbb RR→R that are continuous, non-decreasing and non-negative on [0,∞)[0,\infty)[0,∞). "Strictly positive" means τa(x)>0\tau_a(x) > 0τa​(x)>0 for all x≥0x \ge 0x≥0. "Lipschitz on [0,b][0,b][0,b] with constant MτM_\tauMτ​" means ∣τa(x)−τa(y)∣≤Mτ∣x−y∣|\tau_a(x) - \tau_a(y)| \le M_\tau |x-y|∣τa​(x)−τa​(y)∣≤Mτ​∣x−y∣ for x,y∈[0,b]x, y \in [0,b]x,y∈[0,b]; nothing is assumed beyond bbb.
  • C∗\mathcal C^*C∗ is the real infimum of the total cost over flows, C~\tilde{\mathcal C}C~ the real supremum over WE flows, ρ\rhoρ their quotient. The maxima in (3.3) are real suprema of images of compact sets and Mathlib's sup norm.
  • The corollary is stated for the game (τ,d)(\tau, d)(τ,d) itself; games of the cost slice agree with it on [0,T(d)][0, T(d)][0,T(d)].
  • Corrected slip. The corollary prints the constant 8⋅Mτ⋅∣A∣⋅(∣K∣+1)/τmin⁡(0)⋅Mτ8 \cdot M_\tau \cdot |A| \cdot (|\mathcal K|+1)/\tau_{\min}(0) \cdot M_\tau8⋅Mτ​⋅∣A∣⋅(∣K∣+1)/τmin​(0)⋅Mτ​, with MτM_\tauMτ​ twice. The display it summarizes has MτM_\tauMτ​ once, which is what is posed; it implies the printed form whenever Mτ≥1M_\tau \ge 1Mτ​≥1.

A trivializing formalization is ruled out: the threshold δ\deltaδ is chosen before ddd (choosing it after ddd makes the statement vacuous), T(d)>0T(d) > 0T(d)>0 is required (at T(d)=0T(d) = 0T(d)=0 Lean's 0/0=00/0 = 00/0=0 would make ρ=0\rho = 0ρ=0), every game considered lies in the game space, and the bounds use ≤\le≤, which holds at equality cases.

Contributions welcome: proofs of the milestones, the comparison of WE costs under pointwise cost perturbation (the variational inequality of Wardrop equilibria), and existence of Wardrop equilibria for costs that are continuous and monotone only on [0,∞)[0,\infty)[0,∞). The source is the arXiv preprint v3; the published version in Mathematics of Operations Research is not the cited artifact.

Selected references

  • Z. Wu, R. H. Möhring, A sensitivity analysis of the PoA in non-atomic congestion games, arXiv:2007.13979v3, 2021; published as A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games, Mathematics of Operations Research 48(3), 2023. https://arxiv.org/abs/2007.13979 , https://doi.org/10.1287/moor.2022.1292
  • R. Colini-Baldeschi, R. Cominetti, P. Mertikopoulos, M. Scarsini, When is selfish routing bad? The price of anarchy in light and heavy traffic, Operations Research 68(2), 2020. https://doi.org/10.1287/opre.2019.1894
  • T. Roughgarden, É. Tardos, How bad is selfish routing?, Journal of the ACM 49(2), 2002. https://doi.org/10.1145/506147.506153
  • H. Youn, M. T. Gastner, H. Jeong, Price of anarchy in transportation networks: efficiency and optimality control, Physical Review Letters 101, 2008. https://doi.org/10.1103/PhysRevLett.101.128701
  • S. J. O'Hare, R. D. Connors, D. P. Watling, Mechanisms that govern how the price of anarchy varies with travel demand, Transportation Research Part B: Methodological 84:55–80, 2016 (cited in arXiv:2007.13979v3, p. 50).
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AnalysisOperations ResearchOptimization+1·Captain: mikedeng1

A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games 2: The Social Optimum Cost, the Wardrop Equilibrium Cost and the Price of Anarchy Are Continuous on the Game SpaceResearch Paper

Motivation

Traffic users choose routes for themselves, while a planner may choose routes that minimize everyone's combined travel cost. The price of anarchy measures the cost of the users' equilibrium relative to the planner's optimum. Travel demand and arc latency functions are estimated from data and change over time, so a ratio that changes abruptly under a small input change would be difficult to interpret or use. Wu and Möhring study this sensitivity for nonatomic congestion games, where each individual user has negligible influence on arc flows. Their preprint proves that the optimum cost, equilibrium cost, and their ratio vary continuously over the game space they define. This mission isolates that foundational continuity result. It supplies the qualitative starting point for the paper's later Hölder and Lipschitz estimates.

The cited artifact is arXiv:2007.13979v3, dated 2021. The article subsequently appeared in Mathematics of Operations Research in 2023, but theorem numbers and pages here refer to the preprint.

Setting

Fix finite sets AAA of arcs, SSS of routes, and KKK of origin–destination pairs. Each route sss serves one pair kkk and contains at least one arc. Every arc belongs to some route, and every pair has at least two routes. A game Γ=(τ,d)\Gamma=(\tau,d)Γ=(τ,d) assigns each arc aaa a nonnegative, nondecreasing, continuous latency function τa:[0,∞)→[0,∞)\tau_a:[0,\infty)\to[0,\infty)τa​:[0,∞)→[0,∞) and each pair kkk a nonnegative demand dkd_kdk​. The total demand is T(d)=∑k∈KdkT(d)=\sum_{k\in K}d_kT(d)=∑k∈K​dk​. These are the paper's basic model and standing combinatorial assumptions (pp. 10–11 and 14).

A feasible flow fff puts nonnegative traffic on routes so that the traffic for each pair sums to its demand. The induced arc flow is fa=∑s∋afsf_a=\sum_{s\ni a}f_sfa​=∑s∋a​fs​. Its total cost is

C(Γ,f)=∑a∈Afaτa(fa).C(\Gamma,f)=\sum_{a\in A} f_a\tau_a(f_a).C(Γ,f)=a∈A∑​fa​τa​(fa​).

A social optimum (SO) is a feasible flow minimizing total cost. A Wardrop equilibrium (WE) is a feasible flow in which every route carrying positive traffic has minimum cost among the routes serving the same pair. Write C∗(Γ)C^*(\Gamma)C∗(Γ) for the SO cost and C~(Γ)\widetilde C(\Gamma)C(Γ) for the WE cost. The paper shows that all SO flows have the same cost and all WE flows have the same cost (pp. 11–12 and 18).

A generalized game has the stated nonnegative demands and regular latency functions. The game space G(G,K,S)\mathcal G(G,K,S)G(G,K,S) further requires T(d)>0T(d)>0T(d)>0 and τa(x)>0\tau_a(x)>0τa​(x)>0 for every arc and every 0<x≤T(d)0<x\le T(d)0<x≤T(d), the paper's Condition 2. On this space, the optimum cost is positive and the price of anarchy is defined by

ρ(Γ)=C~(Γ)C∗(Γ).\rho(\Gamma)=\frac{\widetilde C(\Gamma)}{C^*(\Gamma)}.ρ(Γ)=C∗(Γ)C(Γ)​.

For Γ=(τ,d)\Gamma=(\tau,d)Γ=(τ,d) and Γ′=(σ,d′)\Gamma'=(\sigma,d')Γ′=(σ,d′), the paper's distance Dist⁡(Γ,Γ′)\operatorname{Dist}(\Gamma,\Gamma')Dist(Γ,Γ′) is the maximum of three discrepancies: the sup norm of d−d′d-d'd−d′, the largest ∣τa(x)−σa(x)∣|\tau_a(x)-\sigma_a(x)|∣τa​(x)−σa​(x)∣ for a∈Aa\in Aa∈A and 0≤x≤min⁡{T(d),T(d′)}0\le x\le\min\{T(d),T(d')\}0≤x≤min{T(d),T(d′)}, and the sup norm of τ(T(d))−σ(T(d′))\tau(T(d))-\sigma(T(d'))τ(T(d))−σ(T(d′)). The last term compares costs at the two games' respective demand endpoints. Games with equal demands and equal latency functions up to that demand are identified as equivalent (pp. 15–17, (3.1)–(3.3)).

Formalization targets

The supporting milestones establish a positive lower bound for C∗C^*C∗ and an upper bound for ρ\rhoρ (Lemma 3), the distance properties of generalized games (Lemma 4), and behavior of feasible, SO, and WE flows under convergent game sequences (Lemma 5). The goal is the paper's Theorem 6, p. 19: for any sequence Γn∈G(G,K,S)\Gamma_n\in\mathcal G(G,K,S)Γn​∈G(G,K,S) with Dist⁡(Γn,Γ)→0\operatorname{Dist}(\Gamma_n,\Gamma)\to0Dist(Γn​,Γ)→0 and Γ∈G(G,K,S)\Gamma\in\mathcal G(G,K,S)Γ∈G(G,K,S),

C∗(Γn)→C∗(Γ),C~(Γn)→C~(Γ),ρ(Γn)→ρ(Γ).C^*(\Gamma_n)\to C^*(\Gamma),\qquad \widetilde C(\Gamma_n)\to\widetilde C(\Gamma),\qquad \rho(\Gamma_n)\to\rho(\Gamma).C∗(Γn​)→C∗(Γ),C(Γn​)→C(Γ),ρ(Γn​)→ρ(Γ).

Significance

The theorem establishes that sufficiently small changes in both demand and latency data produce small changes in the two total costs and their ratio. It allows the PoA to be treated as a stable observable of a game, including where the identity of an optimum or equilibrium flow changes. The result is qualitative: it does not supply a uniform rate of change. The same paper investigates sharper rates under additional assumptions (§4).

The mathematical result is proved in the paper. In this mission its statements and definitions are compiled Lean drafts, while proofs of Theorem 6 and its milestone lemmas remain open. A completed development would make the game-space metric, limit-of-flow statements, and cost continuity available for later sensitivity results on nonatomic routing.

Difficulty

Pointwise continuity of each τa\tau_aτa​ does not by itself control an optimum or equilibrium when demands change: the feasible-flow sets change with ddd, and a flow for one game need not be feasible for another. A converging sequence of games can also have different optimal or equilibrium flows at every index. The distance compares functions only on demand-relevant intervals, so limits of costs must respect those varying intervals. Finally, continuity of the quotient requires a positive optimum cost throughout the game space; the paper's Condition 2 is what makes that denominator meaningful (pp. 15–19).

Formalization scope

Lean uses finite types for arcs, routes, and pairs; a route is a nonempty 000–111 incidence column and is assigned to one pair. This admits arbitrary route collections rather than insisting on loop-free directed graph paths. The standing network predicate records the nonempty pair set, nonempty routes, every arc's membership in a route, and at least two routes per pair. Costs are total functions on the reals, with continuity, monotonicity, and nonnegativity required only on [0,∞)[0,\infty)[0,∞). Flow feasibility, arc flow, the Wardrop condition, and the potential reuse the published KellyStochasticNetworks_Wardrop definition. The total cost uses the arc formula; C∗C^*C∗ is an infimum over feasible flows and C~\widetilde CC a supremum over WE flows. On valid games these recover the paper's common SO and WE costs.

The distance uses the sup norm on finite vectors and a real supremum over the bounded shared demand interval. Convergence is stated sequentially, following the paper, without imposing a metric-space instance on raw games that may be equivalent. Every theorem involving ρ\rhoρ quantifies over the game space, so a zero denominator or an empty equilibrium set cannot supply a spurious value. The route-count and arc-count factors in Lemma 3 are the actual finite cardinalities. Contributions that establish existence and compactness of relevant flow sets, equivalence of the arc and path cost formulas, and the stated limit properties are useful beyond this theorem.

Selected references

  • Z. Wu and R. H. Möhring, A sensitivity analysis of the PoA in non-atomic congestion games, arXiv:2007.13979v3, 2021. Preprint.
  • Z. Wu and R. H. Möhring, A Sensitivity Analysis of the Price of Anarchy in Nonatomic Congestion Games, Mathematics of Operations Research 48(3), 2023. DOI.
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Economics·Captain: mikedeng1

Online Advertising, Data Sharing, and Consumer Control 3: Under Topics-Style Category Tracking Both Advertisers Bid on ADX1 Exactly When the Inaccuracy τ Is Below an Explicit Threshold τ̃ > 1Research Paper

Motivation

Online display advertising is sold through ad exchanges, and much of its value comes from targeting: showing an ad to consumers known to be interested in the advertised product. For two decades the main tracking technology was the third-party cookie, under which an exchange can follow a consumer only after an advertiser agrees to share the data from its own website. Google's proposed replacement for Chrome, the Topics system, instead lets the browser itself assign consumers to interest categories. Advertisers no longer control that data, and the categories are coarse, so some ads reach consumers who are not interested.

Johnson, Jungbauer and Preuss (SSRN 3898798, Nov. 2022; published in Management Science, 2024, doi:10.1287/mnsc.2022.03385) study how data sharing and consumer control shape competition between ad exchanges. Their §3 adds a Topics-style category system to the base model and asks when advertisers use it, and how the exchange that runs it profits from its accuracy. This mission formalizes that section.

Setting

There are two advertisers A1,A2A_1, A_2A1​,A2​ and two exchanges. ADX1 runs the Topics system. It reaches all 1+η21+\eta_21+η2​ consumers interested in the product category, but reaching a mass one of them takes τ>1\tau>1τ>1 ad impressions; τ\tauτ is the system's inaccuracy. ADX2 offers retargeting through another technology. An advertiser bidding there reaches a fraction σ\sigmaσ of the 1−α1-\alpha1−α consumers who recently visited its own website. An impression costs www. A consumer reached by a single advertiser is worth the monopoly profit MMM, and one reached by both is worth the competition profit CCC. The parameters satisfy

0<α<12,0<w<C<M<2C,0<φ<1,η2>0,τ>1,0≤σ<1,0<\alpha<\tfrac12,\qquad 0<w<C<M<2C,\qquad 0<\varphi<1,\qquad \eta_2>0,\qquad \tau>1,\qquad 0\le\sigma<1,0<α<21​,0<w<C<M<2C,0<φ<1,η2​>0,τ>1,0≤σ<1,

where φ\varphiφ is the share of the ad price an exchange keeps.

The advertisers bid simultaneously, each on one exchange. Write π(x,y)\pi(x,y)π(x,y) for the profit of an advertiser on exchange xxx when its rival is on yyy (p. 17):

π(1,1)=(1+η2)(C−τw),π(2,2)=σ[αM+(1−2α)C−(1−α)w],\pi(1,1)=(1+\eta_2)(C-\tau w),\qquad \pi(2,2)=\sigma[\alpha M+(1-2\alpha)C-(1-\alpha)w],π(1,1)=(1+η2​)(C−τw),π(2,2)=σ[αM+(1−2α)C−(1−α)w], π(1,2)=(1+η2)M−σ(1−α)(M−C)−(1+η2)τw,π(2,1)=σ(1−α)(C−w).\pi(1,2)=(1+\eta_2)M-\sigma(1-\alpha)(M-C)-(1+\eta_2)\tau w,\qquad \pi(2,1)=\sigma(1-\alpha)(C-w).π(1,2)=(1+η2​)M−σ(1−α)(M−C)−(1+η2​)τw,π(2,1)=σ(1−α)(C−w).

An equilibrium is a pure Nash equilibrium of this symmetric 2×22\times22×2 game. ADX1's revenue is φw\varphi wφw per impression sold on it, and an advertiser bidding on ADX1 buys τ(1+η2)\tau(1+\eta_2)τ(1+η2​) impressions. The proof of the main result uses the thresholds

w1=(1+η2)−σ(1−α)τ(1+η2)−σ(1−α) C,w2=[(1+η2)−σ]M+ασCτ(1+η2)−σ(1−α),w_1=\frac{(1+\eta_2)-\sigma(1-\alpha)}{\tau(1+\eta_2)-\sigma(1-\alpha)}\,C,\qquad w_2=\frac{[(1+\eta_2)-\sigma]M+\alpha\sigma C}{\tau(1+\eta_2)-\sigma(1-\alpha)},w1​=τ(1+η2​)−σ(1−α)(1+η2​)−σ(1−α)​C,w2​=τ(1+η2​)−σ(1−α)[(1+η2​)−σ]M+ασC​,

and the accuracy threshold

τ~=(1+η2)−σ(1−α)w(1+η2) C+σ(1−α)1+η2.\tilde\tau=\frac{(1+\eta_2)-\sigma(1-\alpha)}{w(1+\eta_2)}\,C+\frac{\sigma(1-\alpha)}{1+\eta_2}.τ~=w(1+η2​)(1+η2​)−σ(1−α)​C+1+η2​σ(1−α)​.

In Lean these objects are Params, Params.Standing, payoff, IsNE, revenue, w₁, w₂ and tauTilde, in the namespace AdDataSharing.Topics.

Formalization targets

Goal: Proposition 5 (threshold corrected)

τ~>1and[(1,1) is the unique equilibrium  ⟺  τ<τ~].\tilde\tau>1\quad\text{and}\quad\Big[(1,1)\text{ is the unique equilibrium}\iff \tau<\tilde\tau\Big].τ~>1and[(1,1) is the unique equilibrium⟺τ<τ~].

Bidding on ADX1 means cross-targeting the rival's visitors, which Topics cannot avoid. The goal therefore says that both advertisers cross-target exactly when the system is not too inaccurate, and that this region is never empty.

Milestones

  1. (1,1)(1,1)(1,1) is an equilibrium   ⟺  w≤w1  ⟺  τ≤τ~\iff w\le w_1\iff \tau\le\tilde\tau⟺w≤w1​⟺τ≤τ~ (proof of Proposition 5, p. 29).
  2. (2,2)(2,2)(2,2) is an equilibrium   ⟺  w≥w2\iff w\ge w_2⟺w≥w2​ (pp. 29–30).
  3. Each asymmetric profile is an equilibrium   ⟺  w1≤w≤w2\iff w_1\le w\le w_2⟺w1​≤w≤w2​ (p. 30).
  4. w1<w2w_1<w_2w1​<w2​ (p. 30).
  5. τ~>1\tilde\tau>1τ~>1 (p. 30).
  6. Proposition 7 (i): for τ<τ′<τ~\tau<\tau'<\tilde\tauτ<τ′<τ~, ADX1's equilibrium revenue at τ′\tau'τ′ strictly exceeds that at τ\tauτ (p. 19).
  7. Proposition 7 (ii): τ~\tilde\tauτ~ is strictly decreasing in σ\sigmaσ (p. 19).
  8. Corollary 2: above some τˉ\bar\tauτˉ the game has an equilibrium, and ADX1's revenue in every equilibrium is strictly below its revenue in every equilibrium of the base game of §1 without Topics (p. 19).

Significance

Proposition 5 is the entry point of the paper's Topics analysis. It identifies when a category-based system is actually used, and it implies that removing advertisers' property rights over their data leads to more information being shared about consumers' purchase interests. Proposition 7 adds an incentive result: inside the region of use, the exchange running Topics gains from making it less accurate, because inaccuracy sells more impressions. A weaker rival exchange widens that region. Corollary 2 adds a regulatory point: a privacy rule that sets a high minimum inaccuracy can lead the exchange not to introduce the system at all. Corollary 2 compares against ADX1's equilibrium revenue in the base game of §1, which mission 1 of this series formalizes; its definitions are shared with this mission.

The results are proved in the paper, and none of them has a machine-checked proof. Formalizing them also corrects the printed statement. Display (6) on p. 17 omits a factor 1/(1+η2)1/(1+\eta_2)1/(1+η2​), and with the printed threshold the equivalence of Proposition 5 is false. The mission states the threshold that the page's own deviation condition gives.

Difficulty

The algebra is elementary, and the care lies in the equilibrium bookkeeping. "In the equilibrium both advertisers bid on ADX1" is a uniqueness claim. At τ=τ~\tau=\tilde\tauτ=τ~ the profile (1,1)(1,1)(1,1) is still an equilibrium, but the asymmetric profiles are equilibria too. A proof that only checks deviations from (1,1)(1,1)(1,1) therefore gets the wrong boundary. A proof also has to rule out every other profile, using w1<w2w_1<w_2w1​<w2​ and the signs of the denominators. Each threshold is a quotient, and its denominator τ(1+η2)−σ(1−α)\tau(1+\eta_2)-\sigma(1-\alpha)τ(1+η2​)−σ(1−α) is positive only because τ>1>σ\tau>1>\sigmaτ>1>σ. Proposition 7 (i) compares two different games, and Corollary 2 needs equilibrium existence together with a threshold that is uniform in the profile.

Formalization scope

All quantities are real. The game is the platform's general two-player pure Nash equilibrium CompetingChains.Cournot.IsPureNash, which this mission references, applied with payoffs π(x,y)\pi(x,y)π(x,y) and π(y,x)\pi(y,x)π(y,x). There is no contracting stage and no equilibrium selection, as footnote 22 of the paper states. Deviation inequalities are weak, so the exact conditions read w≤w1w\le w_1w≤w1​ and w≥w2w\ge w_2w≥w2​ where the proof writes strict inequalities as sufficient conditions.

Three assumptions are added relative to §3, and each is disclosed. C>wC>wC>w is used throughout the paper and stated on p. 21. σ≥0\sigma\ge0σ≥0 is the reading of "a fraction σ<1\sigma<1σ<1". η2>0\eta_2>0η2​>0 comes from the base model, where it reads η2>η1>0\eta_2>\eta_1>0η2​>η1​>0. The inequalities 2C>M2C>M2C>M and φ<1\varphi<1φ<1 are kept as paper assumptions; they are inert here. Divisions outside the standing assumptions return Lean's junk value 000, and every theorem assumes the standing assumptions.

Several formalizations would trivialize the targets, and none is used. "Both advertisers bid on ADX1" is defined through IsNE and uniqueness, not as an inequality on payoff numbers. The printed threshold (6) is never posed. Statements quantifying over all equilibria also assert that an equilibrium exists, so they cannot hold vacuously. All definitions are local to this mission except the referenced Nash equilibrium notion. Contributions are welcome on any milestone, and a reusable lemma characterizing pure equilibria of 2×22\times22×2 symmetric games would serve all of them.

Selected references

  • J. P. Johnson, T. Jungbauer, M. Preuss, Online Advertising, Data Sharing, and Consumer Control, SSRN working paper 3898798, version of November 2, 2022. https://ssrn.com/abstract=3898798
  • J. P. Johnson, T. Jungbauer, M. Preuss, Online Advertising, Data Sharing, and Consumer Control, Management Science, 2024. https://doi.org/10.1287/mnsc.2022.03385
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EconomicsOperations Research·Captain: mikedeng1

Sharing Sequentially Triggered Losses: Automated Conflict Resolution Through Smart Contracts 3: The Midpoint Fixed-Fraction Rule Is the Shapley Value and the Nucleolus of the Liability GameResearch Paper

Motivation

When one breached contract forces the next party to breach its own contract, a single failure travels down a loss chain: agent 1 (the initiator) causes a loss ℓ1\ell_1ℓ1​ to agent 2, which can then no longer honour its agreement with agent 3 and causes it a loss ℓ2\ell_2ℓ2​, and so on until agent nnn causes a loss ℓn\ell_nℓn​ to a final victim. Gudmundsson, Hougaard and Ko (Management Science 70(3), 2024) ask how the total loss should be shared among the agents of the chain, with the aim of encoding the answer in a smart contract that settles such disputes automatically.

Their central rules are the fixed-fraction rules φλ\varphi^\lambdaφλ, under which every agent pays a fixed fraction λ\lambdaλ of the loss it caused and the initiator also pays the remaining fraction 1−λ1-\lambda1−λ of the total. An axiomatic characterization (their Theorem 1) singles out the whole family λ∈[0,1]\lambda\in[0,1]λ∈[0,1] but not a particular member. This mission formalizes the paper's game-theoretic argument for the midpoint λ=1/2\lambda=1/2λ=1/2: the cooperative game that records which coalitions are liable for which losses has the midpoint allocation as both its Shapley value and its nucleolus, the two best-known single-valued solutions of cooperative game theory.

Setting

Agents are N={1,…,n}N=\{1,\dots,n\}N={1,…,n} with n≥1n\ge1n≥1. A loss problem is a vector ℓ=(ℓ1,…,ℓn)∈Ln=R≥0n\ell=(\ell_1,\dots,\ell_n)\in\mathcal L^n=\mathbb R^n_{\ge0}ℓ=(ℓ1​,…,ℓn​)∈Ln=R≥0n​, where ℓi\ell_iℓi​ is the loss agent iii causes to agent i+1i+1i+1; the total loss is L=ℓ1+⋯+ℓnL=\ell_1+\dots+\ell_nL=ℓ1​+⋯+ℓn​. The fixed-fraction rule with parameter λ\lambdaλ assigns

φ1λ(ℓ)=λℓ1+(1−λ)L,φiλ(ℓ)=λℓi (i≥2).\varphi^\lambda_1(\ell)=\lambda\ell_1+(1-\lambda)L,\qquad \varphi^\lambda_i(\ell)=\lambda\ell_i\ (i\ge2).φ1λ​(ℓ)=λℓ1​+(1−λ)L,φiλ​(ℓ)=λℓi​ (i≥2).

A transferable-utility game on NNN is a function vvv assigning a real number to every coalition S⊆NS\subseteq NS⊆N. The liability game of ℓ\ellℓ is

vℓ(S)={∑i∈Sℓiif 1∈S,0otherwise:v_\ell(S)=\begin{cases}\sum_{i\in S}\ell_i&\text{if }1\in S,\\0&\text{otherwise:}\end{cases}vℓ​(S)={∑i∈S​ℓi​0​if 1∈S,otherwise:​

a coalition is liable for the losses its members caused only if it contains the initiator, without whom no loss would have occurred. The contribution of player iii to the grand coalition is Mi(v)=v(N)−v(N∖{i})M_i(v)=v(N)-v(N\setminus\{i\})Mi​(v)=v(N)−v(N∖{i}).

Two solution concepts are compared with φ1/2(ℓ)\varphi^{1/2}(\ell)φ1/2(ℓ).

  • The Shapley value gives player iii
Shi(v)=∑S⊆N∖{i}∣S∣! (n−∣S∣−1)!n!(v(S∪{i})−v(S)).\mathrm{Sh}_i(v)=\sum_{S\subseteq N\setminus\{i\}}\frac{|S|!\,(n-|S|-1)!}{n!}\bigl(v(S\cup\{i\})-v(S)\bigr).Shi​(v)=S⊆N∖{i}∑​n!∣S∣!(n−∣S∣−1)!​(v(S∪{i})−v(S)).
  • An imputation is a vector xxx with ∑i∈Nxi=v(N)\sum_{i\in N}x_i=v(N)∑i∈N​xi​=v(N) and xi≥v({i})x_i\ge v(\{i\})xi​≥v({i}) for all iii. The excess of SSS at xxx is e(S,x)=v(S)−∑i∈Sxie(S,x)=v(S)-\sum_{i\in S}x_ie(S,x)=v(S)−∑i∈S​xi​, and the excess vector θ(x)\theta(x)θ(x) lists the 2n2^n2n excesses in non-increasing order. The nucleolus ν(v)\nu(v)ν(v) (Schmeidler 1969) is the imputation whose excess vector is lexicographically smallest.

A game is convex if v(∅)=0v(\emptyset)=0v(∅)=0 and v(S)+v(T)≤v(S∪T)+v(S∩T)v(S)+v(T)\le v(S\cup T)+v(S\cap T)v(S)+v(T)≤v(S∪T)+v(S∩T) for all S,TS,TS,T.

Formalization targets

Goal: Theorem 3 (p. 15)

For every ℓ∈Ln\ell\in\mathcal L^nℓ∈Ln,

Sh(vℓ)=φ1/2(ℓ)andν(vℓ)=φ1/2(ℓ),\mathrm{Sh}(v_\ell)=\varphi^{1/2}(\ell)\qquad\text{and}\qquad \nu(v_\ell)=\varphi^{1/2}(\ell),Sh(vℓ​)=φ1/2(ℓ)andν(vℓ​)=φ1/2(ℓ),

where the second identity is stated as: φ1/2(ℓ)\varphi^{1/2}(\ell)φ1/2(ℓ) is an imputation of vℓv_\ellvℓ​ with lexicographically minimal sorted excess vector, and every imputation with this property equals φ1/2(ℓ)\varphi^{1/2}(\ell)φ1/2(ℓ).

Milestones (Appendix A, proof of Theorem 3, p. 24)

  1. vℓv_\ellvℓ​ is convex.
  2. (§4.2, p. 15; referenced, already on the platform) the core of a convex game is non-empty and contains its Shapley value, which applies to vℓv_\ellvℓ​ by milestone 1.
  3. M1(vℓ)=LM_1(v_\ell)=LM1​(vℓ​)=L and Mi(vℓ)=ℓiM_i(v_\ell)=\ell_iMi​(vℓ​)=ℓi​ for i≠1i\ne1i=1.
  4. Every nucleolus ν\nuν of vℓv_\ellvℓ​ satisfies νi=Mi(vℓ)/2=ℓi/2=φi1/2(ℓ)\nu_i=M_i(v_\ell)/2=\ell_i/2=\varphi^{1/2}_i(\ell)νi​=Mi​(vℓ​)/2=ℓi​/2=φi1/2​(ℓ) for i≠1i\ne1i=1, and ν1=φ11/2(ℓ)\nu_1=\varphi^{1/2}_1(\ell)ν1​=φ11/2​(ℓ).
  5. The Shapley value of vℓv_\ellvℓ​ is a nucleolus of vℓv_\ellvℓ​.

Significance

The result. Theorem 1 of the paper leaves a one-parameter family of rules, and a designer who writes the rule into a contract must still choose λ\lambdaλ. Theorem 3 gives a reason for λ=1/2\lambda=1/2λ=1/2 that does not depend on the axioms: if losses are treated as the worth of coalitions, two solution concepts that are built on unrelated principles (average marginal contributions on one side, lexicographic minimization of complaints on the other) both return φ1/2(ℓ)\varphi^{1/2}(\ell)φ1/2(ℓ). Together with the paper's Theorem 2 (equidistance from ideal allocations, a separate mission of this series) it makes the midpoint the paper's recommended rule.

Formalizing it. The paper proves Theorem 3 by citing two results of Muto, Nakayama, Potters and Tijs (1988) on big boss games, the nucleolus formula (their Theorem 4.2) and the coincidence of Shapley value and nucleolus for convex big boss games (their Theorem 4.5); the paper itself proves only convexity and the marginal contributions. A formal proof must therefore establish the nucleolus of vℓv_\ellvℓ​ directly from Schmeidler's lexicographic definition. No nucleolus definition exists on the platform (searched 2026-10-14), and this mission introduces one. The Shapley value and convex games are reused from the platform's published definitions, and the core-contains-the-Shapley-value theorem for convex games is already proved there.

Difficulty

Convexity and the marginal contributions are finite case analyses. The Shapley identity is a weighted sum over all coalitions not containing a player and needs the combinatorial identities behind the weights; for vℓv_\ellvℓ​ only the position of the initiator relative to SSS matters.

The substantive part is the nucleolus. Its definition compares sorted vectors of 2n2^n2n excesses, so an argument cannot treat one coalition at a time: showing that a candidate is lexicographically minimal requires controlling how a change of the payoff vector permutes the order of all excesses. The obvious first idea, minimizing only the largest excess (the least core), generally leaves a set of imputations rather than a point, so the comparison must go down the whole sorted list. Coalitions whose excesses tie, which happens for instance when some ℓi=0\ell_i=0ℓi​=0, are where informal arguments about sorted excess vectors are usually loose, and a formal proof has to handle them.

Formalization scope

  • Agents are Fin n with the initiator at index 0; [NeZero n] encodes n≥1n\ge1n≥1, which the paper assumes because 1∈N1\in N1∈N. Loss vectors are Fin n → ℝ with the hypothesis IsLoss ℓ (ℓi≥0\ell_i\ge0ℓi​≥0).
  • A game is Finset (Fin n) → ℝ. The Shapley value is the published Supermodularity.Cooperative.ShapleyValue and convexity the published Supermodularity.Cooperative.IsConvexGame (the supermodular form, equivalent to the increasing-marginal-contribution form used on p. 24).
  • The nucleolus is defined in the mission's Nucleolus file: imputations with efficiency and individual rationality, excess v(S)−∑i∈Sxiv(S)-\sum_{i\in S}x_iv(S)−∑i∈S​xi​ over all 2n2^n2n coalitions including ∅\emptyset∅ and NNN, sorted by ≥ into a list, and compared with List.Lex (· < ·). Including ∅\emptyset∅ and NNN does not change the order, since their excess is 000 at every imputation.
  • The goal states both identities. The nucleolus half is not replaced by membership in the core or by minimality of the largest excess, the minimization runs over imputations and not over all of Rn\mathbb R^nRn, and uniqueness is stated explicitly rather than taken from Schmeidler's theorem.
  • The paper never defines the nucleolus or the Shapley value; the standard definitions (Schmeidler 1969; Shapley 1953) are used.

Contributions welcome: proofs of the milestones; general lemmas on sorted excess vectors (e.g. Kohlberg-type criteria for the nucleolus), which are reusable for every later nucleolus result; Schmeidler's existence and uniqueness theorem; and the general big boss game results of Muto et al. (1988).

Selected references

  • J. Gudmundsson, J. L. Hougaard, C. Y. Ko, Sharing Sequentially Triggered Losses: Automated Conflict Resolution Through Smart Contracts, Management Science 70(3):1773–1786, 2024 (accepted manuscript, 2023). https://doi.org/10.1287/mnsc.2023.4772
  • S. Muto, M. Nakayama, J. Potters, S. Tijs, On big boss games, The Economic Studies Quarterly 39(4):303–321, 1988. https://doi.org/10.11398/economics1986.39.303
  • D. Schmeidler, The nucleolus of a characteristic function game, SIAM Journal on Applied Mathematics 17(6):1163–1170, 1969. https://doi.org/10.1137/0117107
  • L. S. Shapley, A value for n-person games, in Contributions to the Theory of Games II, Annals of Mathematics Studies 28, Princeton University Press, 1953, pp. 307–317. https://doi.org/10.1515/9781400881970-018
  • L. S. Shapley, Cores of convex games, International Journal of Game Theory 1:11–26, 1971. https://doi.org/10.1007/BF01753431
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EconomicsOperations ResearchOptimization·Captain: mikedeng1

Marketplace Leakage 3: The Marketplace Bans Buyer–Seller Communication Above Π*/(v − c), Below η_L When q > c/(v − Π*), and Always When q Is Close to OneResearch Paper

Motivation

Online marketplaces match buyers with sellers and charge a fee per transaction. Once a buyer has found a seller on the platform, both have an incentive to complete the sale off the platform and split the fee they save. This leakage (also called disintermediation) is a central concern for service marketplaces such as Upwork, Thumbtack or AngelList, and several of them respond by hiding the identity of the parties and blocking direct messages until a transaction is committed.

A. Hagiu and J. Wright, Marketplace Leakage (Management Science, 2023; doi:10.1287/mnsc.2023.4757), build a model of a marketplace that cannot prevent leakage by contract and study six strategies against it. Section 5.2 studies the bluntest of them: banning buyer–seller communication. A ban stops leakage, but it also prevents buyers from learning whether the product suits them. Proposition 3 says exactly when the marketplace gains from the ban. This mission formalizes that proposition and the lemmas of its proof (Appendix §8.4).

Setting

There is one marketplace MMM, one seller SSS and a unit mass of buyers with unit demand. The product has value vvv for buyers who want it and marginal cost c<vc<vc<v; the outside option is worth 000.

Allowing communication (the baseline). MMM sets a fee fff per transaction. SSS sets the on-platform price pm=vp_m=vpm​=v and a direct price pd≤vp_d\le vpd​≤v. A buyer who buys directly bears a switching cost sss with distribution GGG; with the uniform distribution of the paper,

G(s)=min⁡{max⁡{s/μ,0},1},μ>0.G(s)=\min\{\max\{s/\mu,0\},1\},\qquad \mu>0 .G(s)=min{max{s/μ,0},1},μ>0.

The seller maximizes its profit (1),

π(pd)=(pd−c) G(v−pd)+(v−c−f) (1−G(v−pd)),\pi(p_d)=(p_d-c)\,G(v-p_d)+(v-c-f)\,\bigl(1-G(v-p_d)\bigr),π(pd​)=(pd​−c)G(v−pd​)+(v−c−f)(1−G(v−pd​)),

and MMM earns f (1−G(v−pd))f\,(1-G(v-p_d))f(1−G(v−pd​)), choosing f≤v−cf\le v-cf≤v−c. The equilibrium profit of MMM is Π∗\Pi^*Π∗. With communication allowed, a buyer values the product at vvv only with probability q∈(0,1)q\in(0,1)q∈(0,1), but learns their valuation; every payoff is multiplied by qqq, so MMM earns qΠ∗q\Pi^*qΠ∗.

Banning communication. Under a ban there is no leakage, but a buyer learns their valuation only with probability η∈[0,1]\eta\in[0,1]η∈[0,1]. Facing the fee fff, the seller has two options: the high price pm=vp_m=vpm​=v, selling to the fraction ηq\eta qηq of informed high-value buyers and earning ηq (v−c−f)\eta q\,(v-c-f)ηq(v−c−f); and the low price pm=qvp_m=qvpm​=qv, selling also to the 1−η1-\eta1−η uninformed buyers and earning (1−η+ηq)(qv−c−f)(1-\eta+\eta q)(qv-c-f)(1−η+ηq)(qv−c−f). It takes the better option (ties to the low price) and lists if that option pays at least 000. MMM earns fff per transaction and chooses f∈Rf\in\mathbb Rf∈R. Its maximal revenue is the ban value V(η)V(\eta)V(η). Two closed forms appear:

ΠH(η)=ηq(v−c),ΠL(η)=(1−η+ηq)((1−(2−q)η)qv1−η−c).\Pi_H(\eta)=\eta q(v-c),\qquad \Pi_L(\eta)=(1-\eta+\eta q)\Bigl(\frac{(1-(2-q)\eta)qv}{1-\eta}-c\Bigr).ΠH​(η)=ηq(v−c),ΠL​(η)=(1−η+ηq)(1−η(1−(2−q)η)qv​−c).

MMM prefers to ban if V(η)>qΠ∗V(\eta)>q\Pi^*V(η)>qΠ∗ and prefers to allow if V(η)<qΠ∗V(\eta)<q\Pi^*V(η)<qΠ∗.

Formalization targets

Goal: Proposition 3 (pp. 15–16)

For 0<Π∗<v−c0<\Pi^*<v-c0<Π∗<v−c:

  1. MMM prefers to ban for every η\etaη with Π∗/(v−c)<η≤1\Pi^*/(v-c)<\eta\le 1Π∗/(v−c)<η≤1;
  2. if q>c/(v−Π∗)q>c/(v-\Pi^*)q>c/(v−Π∗), there is a unique ηL∈[0,1)\eta_L\in[0,1)ηL​∈[0,1) with ΠL(ηL)=qΠ∗\Pi_L(\eta_L)=q\Pi^*ΠL​(ηL​)=qΠ∗, it is positive, and MMM prefers to ban for every η∈[0,ηL)\eta\in[0,\eta_L)η∈[0,ηL​);
  3. there is q0<1q_0<1q0​<1 such that for q∈(q0,1)q\in(q_0,1)q∈(q0​,1), MMM prefers to ban for every η∈[0,1]\eta\in[0,1]η∈[0,1];
  4. with uniform switching costs, c≥0c\ge 0c≥0, and Π∗=Π∗(μ)\Pi^*=\Pi^*(\mu)Π∗=Π∗(μ) the baseline equilibrium profit: for each η∈(0,1)\eta\in(0,1)η∈(0,1), MMM prefers to ban for all sufficiently small μ>0\mu>0μ>0 and prefers to allow for all sufficiently large μ\muμ.

Milestones

f>(1−(2−q)η)qv1−η−c  ⟺  the seller prefers the high price(p. 15)f>\frac{(1-(2-q)\eta)qv}{1-\eta}-c\iff \text{the seller prefers the high price}\qquad(\text{p. 15})f>1−η(1−(2−q)η)qv​−c⟺the seller prefers the high price(p. 15) V(η)=max⁡{ΠH(η),ΠL(η)}(p. 15)V(\eta)=\max\{\Pi_H(\eta),\Pi_L(\eta)\}\qquad(\text{p. 15})V(η)=max{ΠH​(η),ΠL​(η)}(p. 15) dΠLdη=−(1−q)qv(1−η)2((2−η)qη+2(1−η)2)+c(1−q)<0  when qv>c(p. 38)\frac{d\Pi_L}{d\eta}=-\frac{(1-q)qv}{(1-\eta)^2}\bigl((2-\eta)q\eta+2(1-\eta)^2\bigr)+c(1-q)<0\ \text{ when } qv>c\qquad(\text{p. 38})dηdΠL​​=−(1−η)2(1−q)qv​((2−η)qη+2(1−η)2)+c(1−q)<0  when qv>c(p. 38) ΠL(η)≤ΠH(η)  ⟺  η≥η∗,η∗=qv(2−q)−c−q(1−q)v(v−c)qv(3(1−q)+q2)−c∈(0,1)(p. 38)\Pi_L(\eta)\le\Pi_H(\eta)\iff\eta\ge\eta^*,\quad \eta^*=\frac{qv(2-q)-c-q\sqrt{(1-q)v(v-c)}}{qv(3(1-q)+q^2)-c}\in(0,1)\qquad(\text{p. 38})ΠL​(η)≤ΠH​(η)⟺η≥η∗,η∗=qv(3(1−q)+q2)−cqv(2−q)−c−q(1−q)v(v−c)​​∈(0,1)(p. 38) lim⁡q→1−η∗=1(p. 38)\lim_{q\to1^-}\eta^*=1\qquad(\text{p. 38})q→1−lim​η∗=1(p. 38)

Significance

The proposition separates three regimes. When information loss is small (η\etaη near 111) a ban costs almost nothing and removes leakage, so the marketplace bans. When information loss is large and buyers are a priori likely to value the product, the marketplace can induce the low price qvqvqv and sell to everyone, so a ban pays again. In between, allowing communication can win. With uniform switching costs, the comparison turns on how much leakage costs: when switching is cheap (small μ\muμ) the baseline profit μ/2\mu/2μ/2 is small and the ban wins; when it is expensive, leakage is rare and allowing communication wins. The result is proved in the paper by an informal appendix argument. No part of it has been machine-checked. A formal version pins down what the paper leaves implicit: the seller's tie-breaking, the domain of η\etaη on which ΠL\Pi_LΠL​ is defined, which endpoints the strict preferences hold at, and the order of the quantifiers in "sufficiently close to zero (sufficiently large)".

Difficulty

The obvious argument compares two closed forms, but the ban value is not a closed form: it is a maximum over a fee that switches the seller's option and its listing decision. Showing that the maximum is max⁡{ΠH,ΠL}\max\{\Pi_H,\Pi_L\}max{ΠH​,ΠL​} requires checking that the threshold fee keeps the seller listing, and that fees above the threshold earn at most ΠH\Pi_HΠH​. The second obstacle is the shape of ΠL\Pi_LΠL​: it is a rational function with a pole at η=1\eta=1η=1, and its monotonicity rests on the sign of the printed derivative. The comparison point η∗\eta^*η∗ involves a square root, so the equivalence ΠL≤ΠH  ⟺  η≥η∗\Pi_L\le\Pi_H\iff\eta\ge\eta^*ΠL​≤ΠH​⟺η≥η∗ is a quadratic-root argument rather than a one-line inequality. Finally, part 4 needs the baseline equilibrium profit Π∗(μ)\Pi^*(\mu)Π∗(μ) from the full baseline game, i.e. a solution of the seller's problem (1) and the marketplace's problem (3) under uniform GGG.

Formalization scope

All objects are real-valued, with the paper's letters: v c μ q η f; PiStar stands for Π∗\Pi^*Π∗. The standing assumptions c<vc<vc<v, 0<q<10<q<10<q<1 and 0≤η≤10\le\eta\le 10≤η≤1 are explicit hypotheses. The statements use the reduced seller problem (1) with pm=vp_m=vpm​=v, as the paper does after its Lemma 1; Lemma 1 itself is not posed. The uniform GGG is the clamped CDF. Seller optimality, the baseline equilibrium and the ban value are optimality predicates (IsGreatest over the fees), never sSup or a chosen maximizer.

Conventions and disclosed additions:

  • In parts 1–3, Π∗\Pi^*Π∗ is any real in (0,v−c)(0,v-c)(0,v−c), a generalization of the paper's Π∗\Pi^*Π∗ for a general "well behaved" GGG; the proof uses nothing else.
  • Part 4 is posed for each fixed η∈(0,1)\eta\in(0,1)η∈(0,1): it fails at η=0\eta=0η=0 (ban) when qv≤cqv\le cqv≤c and at η=1\eta=1η=1 (allow). It adds c≥0c\ge 0c≥0, without which the marketplace bans for every μ\muμ at small η\etaη.
  • The milestones on the ban value, the derivative's sign and η∗\eta^*η∗ add v>0v>0v>0, which the proof uses without stating; each is false for some v≤0v\le 0v≤0.
  • ΠL\Pi_LΠL​ and the threshold divide by 1−η1-\eta1−η and are stated only for η<1\eta<1η<1; the game itself has no division.
  • "Prefers" is strict in both directions.

Trivializing formalizations are ruled out: the ban value is not defined as max⁡{ΠH,ΠL}\max\{\Pi_H,\Pi_L\}max{ΠH​,ΠL​}, the thresholds in μ\muμ are quantified after η\etaη and not before, Π∗\Pi^*Π∗ is constrained to (0,v−c)(0,v-c)(0,v−c), and preferences are strict.

A complete development needs elementary real analysis only: derivatives of rational functions, the intermediate value theorem on [0,1)[0,1)[0,1), limits at 111, and the baseline solution of (1) and (3) under uniform switching costs. That baseline solution is reusable for the other missions of this series. Proofs of individual milestones are welcome independently.

Selected references

  • A. Hagiu, J. Wright, Marketplace Leakage, Management Science, 2023. Authors' manuscript dated March 2023. doi:10.1287/mnsc.2023.4757
  • A. Piolatto, F. Schuett, Information vs Competition: How Platform Design Affects Profits and Surplus, TILEC Discussion Paper DP2022-002, 2022 (cited in footnote 8 of the paper for the idea that limiting information exchange reduces transaction value on a platform).
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EconomicsOperations ResearchOptimization·Captain: mikedeng1

Quality Strategies in Network Markets: Under Potential Maximization the Equilibrium Quality Equates Marginal Cost to n Times the Harmonic-Mean Valuation Times the Uniform Average of ∂f(i,q)/∂qResearch Paper

Motivation

A firm that sells a network good (a platform, a communication service, a standard) faces consumers whose benefit from buying grows with the number of other buyers. When these network effects are strong, the buying decisions form a coordination game: everybody buying and nobody buying can both be equilibria at the same price and quality. The firm's choice of quality then depends on which equilibrium it expects consumers to play.

The classical answer, going back to Spence's analysis of monopoly quality (Spence 1975), is that a monopolist sets quality for the marginal consumer. Under the usual equilibrium-selection criteria (Pareto dominance, focality) the network-good monopolist inherits this logic. L. T. Chan, Quality Strategies in Network Markets (Management Science, 2023; SSRN copy 4203818), asks what happens when the firm instead anticipates potential maximization, a generalization of risk dominance to many players introduced through the potential games of Monderer and Shapley (1996). The answer is a different first-order condition for quality, in which every consumer's valuation and every possible number of buyers matter. This mission formalizes that condition, Proposition 5 of the paper, together with the chain of results in §3 that leads to it.

Setting

There are n≥1n\ge 1n≥1 consumers N={1,…,n}N=\{1,\dots,n\}N={1,…,n}. Consumer iii has a valuation vi>0v_i>0vi​>0, labelled so that v1≥⋯≥vnv_1\ge\dots\ge v_nv1​≥⋯≥vn​. The benefit f(k,q)≥0f(k,q)\ge 0f(k,q)≥0 of the good when kkk consumers buy at quality qqq is weakly increasing in kkk and, in qqq, weakly increasing and differentiable. The firm's cost of quality c(q)≥0c(q)\ge 0c(q)≥0 is weakly increasing and differentiable.

In stage 1 the firm chooses a price p≥0p\ge 0p≥0 and a quality q≥0q\ge 0q≥0. In stage 2 consumers simultaneously decide whether to buy. If B⊆NB\subseteq NB⊆N is the set of buyers, consumer iii receives the payoff (7)

ui(B,p,q)=vif(∣B∣,q)−p  if i∈B,ui(B,p,q)=0  if i∉B,u_i(B,p,q)=v_if(|B|,q)-p\ \text{ if } i\in B,\qquad u_i(B,p,q)=0\ \text{ if } i\notin B,ui​(B,p,q)=vi​f(∣B∣,q)−p  if i∈B,ui​(B,p,q)=0  if i∈/B,

and the firm earns ∣B∣p−c(q)|B|p-c(q)∣B∣p−c(q). A buyer set BBB is a Nash equilibrium of stage 2 if no buyer gains by leaving and no non-buyer gains by joining. The market has strong network effects at qqq when vif(i,q)v_if(i,q)vi​f(i,q) is strictly increasing in iii.

The potential (10) of a buyer set is

Φ(B,p,q)=∑i=1∣B∣f(i,q)−p∑i∈B1vi.\Phi(B,p,q)=\sum_{i=1}^{|B|}f(i,q)-p\sum_{i\in B}\frac1{v_i}.Φ(B,p,q)=i=1∑∣B∣​f(i,q)−pi∈B∑​vi​1​.

A potential maximizer is a buyer set maximizing Φ(⋅,p,q)\Phi(\cdot,p,q)Φ(⋅,p,q) over all subsets of NNN. A firm that anticipates potential maximization earns Π(p,q)=np−c(q)\Pi(p,q)=np-c(q)Π(p,q)=np−c(q) when all consumers buying is a potential maximizer, and −c(q)-c(q)−c(q) otherwise. In Lean these objects are Market, Market.Standing, Market.StrongNE, Market.u, Market.IsNash, Market.pot, Market.IsPotMax and Market.profitPM in the namespace NetworkQuality.PotentialMax.

Formalization targets

Goal: Proposition 5 (p. 15)

Assume the standing assumptions and strong network effects at every q≥0q\ge 0q≥0. If (p∗,q∗)(p^*,q^*)(p∗,q∗) maximizes Π\PiΠ over p≥0p\ge 0p≥0, q≥0q\ge 0q≥0 and q∗>0q^*>0q∗>0, then

c′(q∗)=n(1n∑i=1n1vi)−11n∑i=1n∂f(i,q∗)∂q.c'(q^*)=n\Big(\frac1n\sum_{i=1}^n\frac1{v_i}\Big)^{-1}\frac1n\sum_{i=1}^n\frac{\partial f(i,q^*)}{\partial q}.c′(q∗)=n(n1​i=1∑n​vi​1​)−1n1​i=1∑n​∂q∂f(i,q∗)​.

The statement is the necessary first-order condition. It fixes no functional form for fff or ccc.

Milestones

  1. (11), p. 13. For i∉B−ii\notin B_{-i}i∈/B−i​: ui(B−i∪{i})−ui(B−i)=vi[Φ(B−i∪{i})−Φ(B−i)]u_i(B_{-i}\cup\{i\})-u_i(B_{-i})=v_i[\Phi(B_{-i}\cup\{i\})-\Phi(B_{-i})]ui​(B−i​∪{i})−ui​(B−i​)=vi​[Φ(B−i​∪{i})−Φ(B−i​)], so stage 2 is a weighted potential game.
  2. §3.5, p. 14. Every potential maximizer is a Nash equilibrium.
  3. Proposition 1, p. 10. Under strong network effects the equilibria are exactly {N}\{N\}{N} for p<v1f(1,q)p<v_1f(1,q)p<v1​f(1,q), {∅}\{\emptyset\}{∅} for p>vnf(n,q)p>v_nf(n,q)p>vn​f(n,q), and {N,∅}\{N,\emptyset\}{N,∅} in between.
  4. (12), p. 14. Under strong network effects every potential maximizer is NNN or ∅\emptyset∅, and NNN is one iff p≤(1n∑i1vi)−11n∑if(i,q)=:p(q)p\le\big(\frac1n\sum_i\frac1{v_i}\big)^{-1}\frac1n\sum_i f(i,q)=:p(q)p≤(n1​∑i​vi​1​)−1n1​∑i​f(i,q)=:p(q).
  5. (13), p. 14. v1f(1,q)∑i1vi≤∑if(i,q)≤vnf(n,q)∑i1viv_1f(1,q)\sum_i\frac1{v_i}\le\sum_i f(i,q)\le v_nf(n,q)\sum_i\frac1{v_i}v1​f(1,q)∑i​vi​1​≤∑i​f(i,q)≤vn​f(n,q)∑i​vi​1​.
  6. (14), p. 15. At each quality the maximal profit over prices p≥0p\ge0p≥0 is n p(q)−c(q)n\,p(q)-c(q)np(q)−c(q), attained at p(q)p(q)p(q).

Significance

The result. Proposition 5 replaces the Spence condition c′(q)=n vn ∂f(n,q)/∂qc'(q)=n\,v_n\,\partial f(n,q)/\partial qc′(q)=nvn​∂f(n,q)/∂q (Proposition 4 of the paper) by one in which the marginal consumer's valuation vnv_nvn​ is replaced by the harmonic mean of all valuations, and the equilibrium benefit f(n,q)f(n,q)f(n,q) by its uniform average over the number of buyers. Comparing it with the social optimum (Proposition 3, arithmetic mean of valuations) shows that a firm worried about miscoordination underprovides quality relative to the planner, increasingly so as valuations become more dispersed, and that it tends to undersupply (oversupply) quality when the number of buyers and quality are complements (substitutes) in the benefit fff (p. 15).

Formalizing it. The paper's arguments are in the main text (§3.2 and §3.5) and are short; some steps are only sketched: Proposition 1's proof treats only buyer sets of the form {1,…,k}\{1,\dots,k\}{1,…,k}, and (12) is derived only in the price range with two equilibria. A machine-checked development makes these steps complete, fixes the tie-breaking convention of the selection, and isolates exactly which assumptions the first-order condition uses (none of the convexity the paper assumes). No part of this result has a machine-checked proof at the time of writing.

Difficulty

The objects are finite and the algebra is elementary, so the difficulty lies in bookkeeping that the paper leaves implicit. The obvious reading of Proposition 1, "consumers 111 to kkk buy", is not forced when valuations tie; excluding an arbitrary buyer set of intermediate size needs a comparison between its weakest buyer and its strongest non-buyer, using the ordering of valuations and nonnegativity of fff. The characterization (12) is a statement about maximizers over all 2n2^n2n buyer sets, not just about the two candidates the text compares, so it rests on the reduction "potential maximizer ⇒ Nash equilibrium ⇒ NNN or ∅\emptyset∅". Finally the firm optimizes jointly over price and quality against a discontinuous profit function; the first-order condition only appears after the price has been optimized out at each quality, and it needs differentiability at an interior optimum.

Formalization scope

Consumers are Fin n; the paper's consumer iii is Lean index i−1i-1i−1, while the first argument of fff is a number of buyers in ℕ, so ∑i=1nf(i,q)\sum_{i=1}^n f(i,q)∑i=1n​f(i,q) is ∑ i : Fin n, M.f (i.val + 1) q. v1v_1v1​ and vnv_nvn​ are M.v ⟨0, _⟩ and M.v ⟨n - 1, _⟩. fff and ccc are total functions on ℝ.

The standing assumptions (Market.Standing, pp. 4 and 9) are: n≥1n\ge1n≥1; vi>0v_i>0vi​>0 and vvv antitone; for k≥1k\ge1k≥1 and q≥0q\ge0q≥0, f(k,q)≥0f(k,q)\ge0f(k,q)≥0, fff weakly increasing in kkk and in qqq on [0,∞)[0,\infty)[0,∞), f(k,⋅)f(k,\cdot)f(k,⋅) differentiable on (0,∞)(0,\infty)(0,∞); c≥0c\ge0c≥0 on [0,∞)[0,\infty)[0,∞), weakly increasing there and differentiable on (0,∞)(0,\infty)(0,∞). Statements about a single quality add q≥0q\ge0q≥0, the paper's domain.

Added hypotheses, each disclosed in the items: equilibria are pure (buyer sets); the goal assumes an interior quality q∗>0q^*>0q∗>0 and strong network effects at every q≥0q\ge0q≥0; the "sufficiently convex" cost of p. 4 is dropped, so the goal is the necessary condition only. The profit under potential maximization selects "all buy" at the tie Φ(N)=Φ(∅)\Phi(N)=\Phi(\emptyset)Φ(N)=Φ(∅), as the paper's "if and only if p≤…p\le\dotsp≤…" does.

The profit is defined through the selection (IsPotMax over all buyer sets), not as the reduced formula (14), and the goal's optimality hypothesis ranges over price and quality jointly; defining the profit by (14), or restricting maximizers to {N,∅}\{N,\emptyset\}{N,∅}, would trivialize the mission and is ruled out. Derivatives are deriv, and the standing assumptions guarantee they are genuine at q∗>0q^*>0q∗>0.

Everything needed beyond Mathlib (Finset, deriv, IsLocalMax) is in the single definition file. Proofs of the milestones in any order are welcome, as are proofs of the goal that use the milestones as stepping stones.

Selected references

  • L. T. Chan, Quality Strategies in Network Markets, Management Science, 2023. https://doi.org/10.1287/mnsc.2023.4792 (SSRN version of April 2023: https://ssrn.com/abstract=4203818)
  • D. Monderer and L. S. Shapley, Potential Games, Games and Economic Behavior 14 (1996), 124–143. https://doi.org/10.1006/game.1996.0044
  • A. M. Spence, Monopoly, Quality, and Regulation, Bell Journal of Economics 6 (1975), 417–429. https://www.jstor.org/stable/3003302
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