Optimal Markets

Game Theory Based Auctions

The current first generation auction web sites use simple auction designs. Possibly the most common is the design in which a seller (or buyer) offers a single item, or a single lot of items and invites bidders to submit bids. The current winning bid is usually the only feedback that bidders have, this auction typically has a fixed deadline, bidders bid on only one dimension (usually price only), and there is only one winner. Rudimentary improvements to this design may include automatic deadline extensions and proxy bids.

However, for the past few years, game theorists from the world's top universities and consulting companies have been designing and deploying far more sophisticated auction designs. These designs have been deployed very successfully in multi-billion dollar auctions for a number of years. Examples include the sale of wireless spectrum by the FCC and the procurement of electricity by state and regional authorities. These auction designs are more efficient, maximize profits for both buyers and sellers, and are not subject to collusion and other games bidders may play to adversely affect the outcome of the auction. These efforts resulted in a Nobel prize in economics.

Optimal markets has worked with many of these game theorists and has combined this knowledge with the latest AJAX powered Web 2.0 technologies to provide the first Auction 2.0 software, that is: real-time, game theory-based web-enabled auctions.

Here are a few examples of the auction designs we offer:

  • Clock Auctions — in this design, bidding occurs in discrete rounds (usually between 1 and 5 minutes each). At each round, the auctioneer submits an offer, and the bidders respond with bids, subject to certain activity and eligibility rules. These auctions typically last 10-20 rounds, and may have several winners, that is the quantity offered may be allocated to more than one winner, at the same price.
  • Simultaneous Multiple Round Auction — this design is essentially several clock auctions running in parallel, in which bidders may be given the opportunity to switch some or all of their bids between products. Typically this auction design is deployed when the products are substitutes, though it has been shown to be extremely effective even when products are complimentary. This type of auction design has been in continuous use by the FCC for over 10 years.
  • Package Bidding — this is the most sophisticated design Optimal Markets offers, and is used when auctioning complex items which may be subject to multiple constraints. Game theory-based Clock auction technology and optimization technology from the field of operations research are combined in these auction designs.