Limitations of the VCG
The Vickrey-Clarke-Groves (VCG) auction mechanisms are commonly used to analyze dominant strategies in a second price auction. While the VCG in theory makes understanding the benefit of truthful bidding in an auction simple, the VCG in practice is not quite as useful, especially when applied to the pricing of inter-domain and ad hoc networks. Significantly, the VCG overlooks a couple of significant theoretical issues, such as low or zero seller revenues. According to Patrick Maille and Bruno Tuffin in “Why VCG auctions can hardly be applied to the pricing of inter-domain and ad hoc networks,” the VCG mechanism there is no balanced budget to make the system continuously function. The VCG procedure is reliant upon an unlimited number of resources such as power, bandwidth, and spectrum. Since there is no regulator of the process the sum of subsidies can easily outweigh the sum of charges paid by traffic senders implying that there constantly must be an influx of money in the system. The root of this problem generates from the fact that while the seller is selling the item at a given price the VCG procedure allows for the individual whose valuations are the smallest to walk away with an item at the cost of zero. This therefore creates an imbalance of costs and revenue between seller and buyer. According to Maille, an effective theoretical procedure would take into account the buyer’s willingness to pay to determine if the system is socially optimal if and only if the sender valuation for the traffic exceeds the sum of transfer costs of the intermediate domains.
Furthermore, another limitation of our theory lies in the fact that it is probable to cause collusion. In the event that there are 3 items for which there are 3 bidders placing the same exact valuations upon each item, if the VCG is run, each will win their item at a price of zero, since technically each is bidding the lowest price. Hence, this will encourage collusion in auctions and render them an unfair auction and unfair advantage over the sellers. The limitations of the VCG demonstrate how it should be utilized as a generalized understanding and analysing of a second price auction because realistically there are many human factors that the VCG does not consider and ultimately render the VCG useless.
Sources:
Lovely but Lonely Vickrey Auction-072404a. (n.d.). Retrieved November 13, 2020, from https://web.stanford.edu/~milgrom/publishedarticles/Lovely%20but%20Lonely%20Vickrey%20Auction-072404a.pdf
Why VCG auctions can hardly be applied to the pricing of. (n.d.). Retrieved November 13, 2020, from http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.332.251