A New Mechanism for Social Network Auctions Developed from Flaws of VCG Procedure
The reference academic paper written by researchers at the University of Electronic Science and Technology of China and ShanghaiTech University can be found here.
This paper discusses the fallbacks that the VCG procedure can have when allocating matchings and prices to participants in a single item auction generalized as a social network, which is a procedure we thoroughly discussed in class when dealing with perfect market matchings in prices.
Overall, the researchers generalized the classic single item auction into a social network setting where the auction information is propagated through the members of the network and people who do not receive the information cannot be involved in the auction. They then analyzed the use of the VCG mechanism, and then went on to propose a new mechanism that they found to be more efficient.
Researchers found that the well known VCG mechanism applies an efficient allocation and charges each participant in the network the social harm he/she causes others by their participation. They go on to prove that the VCG mechanism is individually rational and incentive compatible. They prove that the VCG mechanism can in fact incentivize information diffusion which is plus for using this mechanism to make allocations and assign prices. They also show through some complex equations and proofs that a seller would rather prefer the second price auction to the VCG mechanism in terms of the revenue they receive. They will incentivize buyers to spread auction information in order to obtain this high revenue with the second price auction mechanism. However, with the VCG mechanism, a seller is not able to do this. The researchers ultimately prove that the VCG mechanism can incentivize information diffusion, but it will in turn reduce the seller’s revenue and possibly lead to a revenue deficit, which will disincentivize the seller to apply the VCG mechanism.
Following this proof of the undesirable performance of the VCG mechanism, the researchers go on to propose a new mechanism called the information diffusion mechanism (IDM) that has a remarkably better performance than the VCG mechanism. The goal of the researchers was to design this mechanism that can improve both the efficiency and the seller’s revenue, by incentivizing all participants to further propagate the auction information, which in turn leads to a more efficient allocation and more revenue to the seller. The reasoning behind the IDM is that information diffusion is rewarded with more revenue if it leads to a more efficient matching in the market. They did this through multiple proofs in arguing that the proposed IDM is more efficient than VCG. This novel information diffusion mechanisms not only incentivizes information diffusion throughout the network, but also increases the social welfare and each seller’s revenue, which the VCG was proved to be incapable of achieving.
Source: http://dengji-zhao.net/publications/AAAI/AAAI%2017-LiHaoZhaoZhou.pdf