Skip to main content Accessibility help
×
Home
  • Print publication year: 2017
  • Online publication date: October 2017

27 - An Experimental Test of Flexible Combinatorial Spectrum Auction Formats

from Part IV - Experimental Comparisons of Auction Designs

Summary

Simultaneous auctions for multiple items are often used when the values of the items are interrelated. An example of such a situation is the sale of spectrum rights by the Federal Communications Commission (FCC). If a telecommunications company is already operating in a certain area, the cost of operating in adjacent areas tends to be lower. In addition, consumers may value larger networks that reduce the cost and inconvenience of “roaming.” As a consequence, the value of a collection of spectrum licenses for adjacent areas can be higher than the sum of the values for separate licenses. Value complementarities arise naturally in many other contexts, e.g. aircraft takeoff and landing slots, pollution emissions allowances for consecutive years, and coordinated advertising time slots. This paper reports a series of laboratory experiments to evaluate alternative methods of running multi-unit auctions, in both high and low-complementarities environments.

Various auction formats have been suggested for selling multiple items with interrelated values. The most widely discussed format is the simultaneous multiple round (SMR) auction, first used by the FCC in 1994. In the SMR auction, bidders are only allowed to bid on single licenses in a series of “rounds,” and the auction stops when no new bids are submitted on any license. To win a valuable package of licenses in this type of auction, bidders with value complementarities may have to bid more for some licenses than they are worth individually, which may result in losses when only a subset is won. Avoidance of this “exposure problem” may lead to conservative bidding, lower revenue, and inefficient allocations.

The obvious solution to the exposure problem is to allow bidding for packages of items. In such combinatorial auctions, bidders can make sure they either win the entire package or nothing at all. As a result, bids can reflect value complementarities, which should raise efficiency and seller revenue. Combinatorial bidding, however, may introduce new problems. Consider a situation in which a large bidder submits a package bid for several licenses. If other bidders are interested in buying different subsets of licenses contained in the package, they might find it hard to coordinate their actions, even if the sum of their values is higher than the value of the package to the large bidder (the threshold problem). Thus, there is no clear presumption that package bidding will improve auction performance.

Ausubel, Lawarence M., Peter, Cramton, and Paul, Milgrom. 2005. “The Clock-Proxy Auction: A Practical Combinatorial Design,” in Combinatorial Auctions, Eds. P., Cramton, R., Steinberg and Y., Shoham, MIT Press.
Banks, Jeffrey S., John O., Ledyard, and David P., Porter. 1989. “Allocating Uncertain and Unresponsive Resources: An Experimental Approach,” Rand Journal of Economics, 20 1: 1–25.
Banks, Jeffrey S.,Mark, Olson, David P., Porter, Stephen J., Rassenti, and Vernon L., Smith. 2003. “Theory, Experiment and the Federal Communications Commission Spectrum Auctions,” Journalof Economic Behavior and Organization, 51: 303–350.
Goeree, Jacob K., and Charles A., Holt. 2005. “Comparing the FCC's Combinatorial and Non-Combinatorial Simultaneous Multi-Round Auctions: Experimental Design Report,” Report prepared for the Wireless Communications Bureau of the Federal Communications Commission.
Goeree, Jacob K., Charles A., Holt, and John O., Ledyard. 2006. “An Experimental Comparison of the FCC's Combinatorial and Non-Combinatorial Simultaneous Multiple Round Auctions,” Report prepared for the Wireless Communications Bureau of the Federal Communications Commission.
Goeree, Jacob K., and Charles A., Holt. 2010. “Hierarchical Package Bidding: A ‘Paper & Pencil’ Combinatorial Auction,” Games and Economic Behavior, 70 1: 146–169.
Kwasnica, Anthony M., John O., Ledyard, David P., Porter, and Christine, DeMartini. 2005. “A New and Improved Design for Multi-Object Iterative Auctions,” Management Science, 51 3: 419–434.
Ledyard, John O., David P., Porter, and Antonio, Rangel. 1997. “Experiments Testing Multiobject Allocation Mechanisms,” Journal of Economics and Management Strategy, 6 3: 639–675.
McAfee, Preston R., and John, McMillan. 1996. “Analyzing the Airwaves Auction,” Journal ofEconomic Perspectives, 10 1: 159–175.
McCabe, Kevin, Stephen J., Rassenti, and Vernon L., Smith. 1989. “Designing ‘Smart’ Computer Assisted Markets,” European Journal of Political Economy, 5: 259–283.
Porter, David P. 1999. “The Effect of Bid Withdrawal in a Multi-Object Auction,” Review of EconomicDesign, 4 1: 73–97.
Porter, David P., Stephen J., Rassenti, Anil, Roopnarine, and Vernon L., Smith. 2003. “Combinatorial Auction Design,” Proceedings of the National Academy of Sciences, 100 19: 11153–11157.
Rassenti, Stephen J., Vernon L., Smith, and Robert L., Bulfin. 1982. “A Combinatorial Auction Mechanism for Airport Time Slot Allocation,” Bell Journal of Economics, 13: 402–417.
Rothkopf, Michael H., Aleksandar, Pekec, and Ronal M., Harstad. 1998. “Computationally Manageable Combinational Auctions,” Management Science, 44: 1131–1147.
KelsoAS, Crawford VP (1982) Jobmatching, coalition formation, and gross substitute. Econometrica 50:1483–1504
Kwasnica, T, Ledyard, JO, Porter, D, DeMartini C (2005) A new and improved design for multiobjective iterative auctions. Management Science 51 (3):419–434
Lamy, L (2009) Core-selecting package auctions: A comment on revenue-monotonicity. International Journal of Game Theory 37
Ledyard, J, Porter, D, Rangel, A (1997) Experiments testing multiobject allocationmechanisms. Journal of Economics, Management, and Strategy 6:639–675
Meeus, L, Verhaegen, K, Belmans, R (2009) Block order restrictions in combinatorial electric energy auctions. European Journal of Operational Research 196:1202–1206
Milgrom, P (2000) Putting auction theory to work: The simultaneous ascending auction. Journal of Political Economy 108 (21):245–272
Miller, GA (1956) The magical number seven, plus or minus two: Some limits on our capacity for processing information. Psychological Review 63:81–97
Moreton, PS, Spiller, PT (1998) What's in the air: Interlicense synergies in the Federal Communications Commission's broadband personal communication service spectrum auctions. Journal of Law and Economics 41 (2):677–716
Porter, D, Smith, V (2006) FCC license auction design: A 12-year experiment. Journal of Law Economics and Policy 3
Porter, D, Rassenti, S, Roopnarine, A, Smith V (2003) Combinatorial auction design. Proceedings of the National Academy of Sciences of the United States of America (PNAS) 100:11,153–11,157
Rassenti, S, Smith, VL, Bulfin, RL (1982) A combinatorial auction mechanism for airport time slot allocations. Bell Journal of Economics 13:402–417
Rothkopf, MH, Pekec, A, Harstad, RM (1998) Computationally manageable combinatorial auctions. Management Science 44:1131–1147
Scheffel, T, Pikovsky, A, Bichler, M, Guler K (2010) An experimental comparison of linear and nonlinear price combinatorial auctions. Information Systems Research 22 (2):346–368
Schneider, S, Shabalin, P, Bichler, M (2010) On the robustness of non-linear personalized price combinatorial auctions. European Journal of Operational Research 206 (1):248–259