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CMU 15-896 Mechanism design 2: With money Teacher: Ariel Procaccia MD with money Money gives us a powerful tool to align the incentives of players with the designers objectives We will only cover a tiny fraction of the very basics

  1. CMU 15-896 Mechanism design 2: With money Teacher: Ariel Procaccia

  2. MD with money • Money gives us a powerful tool to align the incentives of players with the designer’s objectives • We will only cover a tiny fraction of the very basics of auction theory and algorithmic mechanism design 15896 Spring 2016: Lecture 22 2

  3. Second-Price Auction • Bidders submit sealed bids • One good allocated to highest bidder • Winner pays price of second highest bid!! • Bidder’s utility = value minus payment when winning, zero when losing • Amazing observation: Second-price auction is strategyproof; bidding true valuation is a dominant strategy!! 15896 Spring 2016: Lecture 22 3

  4. Strategyproofness: bidding high • Three cases based on highest lose, as before other bid (blue dot) bid • Higher than bid: lose before and after win, overpay! • Lower than valuation: win valuation before and after, pay same win, pay as before • Between bid and valuation: lose before, win after but overpay 15896 Spring 2016: Lecture 22 4

  5. Strategyproofness: bidding low • Three cases based on highest other bid (blue dot) lose, as before • Higher than valuation: lose before and after • Lower than bid: win before valuation and after, pay the same lose, want to win! • Between valuation and bid: bid win before with profit, lose after win, pay as before 15896 Spring 2016: Lecture 22 5

  6. Vickrey-Clarke-Groves Mechanism set of bidders, set of items • • Each bidder has a combinatorial valuation � � function � • Choose an allocation � to � maximize social welfare: � � �∈� • If the outcome is , bidder pays � � � � � � � ��� ��� 15896 Spring 2016: Lecture 22 6

  7. VCG Mechanism • Suppose we run VCG and there are: item, denoted o bidders o � � o Poll: What is the payment of player 1 in this example? 15896 Spring 2016: Lecture 22 7

  8. VCG Mechanism • Theorem: VCG is strategyproof • Proof: When the outcome is , the utility of bidder is � � � � � � � � � ��� ��� � � � � � � � �∈� ��� Aligned with social Independent of the bid of � welfare 15896 Spring 2016: Lecture 22 8

  9. Single minded bidders • Allocate to maximize social welfare • Consider the special case of single minded bidders: each bidder values a subset � of items at � and any subset that does not contain � at • Theorem (folk): optimal winner determination is NP-complete, even with single minded bidders 15896 Spring 2016: Lecture 22 9

  10. Winner determination is hard • I NDEPENDENT SET (IS): given a graph, 1 a 2 is there a set of vertices of size such that no two are connected? d c b • Given an instance of IS: 4 3 The set of items is � o Player for each vertex o 1: {a,c,d} Desired bundle is adjacent edges, value o is 1 2: {a,b} 3: {b,c} • A set of winners satisfies � � 4: {d} for every iff the vertices in are an IS 15896 Spring 2016: Lecture 22 10

  11. SP approximation • In fact, optimal winner determination in combinatorial auctions with single-minded bidders is NP-hard to approximate to a �/��� factor better than • If we want computational efficiency, can’t run VCG • Need to design a new strategyproof, computationally efficient approx algorithm 15896 Spring 2016: Lecture 22 11

  12. The greedy mechanism: • Initialization: ∗ ∗ ∗ � � � � � � ∗ � ∗ � ⋯ � Reorder the bids such that ∗ o � � � � � � � ← ∅ o ∗ ∗ • For : if then � �∈� � • Output: Allocation: The set of winners is � o ∗ ⋅ ∗ / ∗ , where Payments: For each � ∈ � , � � � � � � � � � o ∗ ∩ � ∗ � ∅ , and for all � is the smallest index such that � � � ∗ ∩ � � ∗ � ∅ (if no such � exists then � � � 0 ) � � �, � � �, � � 15896 Spring 2016: Lecture 22 12

  13. SP approximation • Theorem [Lehmann et al. 2001]: The greedy mechanism is strategyproof, poly time, and gives a -approximation • Note that the mechanism satisfies the following two properties: ∗ , he will ∗ Monotonicity: If wins with � � o ∗ and � � � ∗ win with � � � Critical payment: A bidder who wins pays o the minimum value needed to win 15896 Spring 2016: Lecture 22 13

  14. Proof of SP • We will show that bidder cannot gain by � instead of truthful � reporting � � � � � is a winning bid � • Can assume that � � � and � � � with payment is at least as good • � � � with payment � as because � � � by is at least as good as • � � � � similar reasoning to Vickrey auction 15896 Spring 2016: Lecture 22 14

  15. Proof of approximation • For , let ∗ ∗ � � � , so enough that for , • � �∈� ∗ ∗ � � �∈ � ∗ ∗ � � � � ∗ • For each � , � ∗ � � 15896 Spring 2016: Lecture 22 15

  16. Proof of approximation • Summing over all � , ∗ � ∗ ∗ � � ∗ �∈ �∈ � � � � � • Using Cauchy-Schwarz ∑� � � � � ∑ � � ∑ � � , � � ∗ ∗ � � � �∈ �∈ � � 15896 Spring 2016: Lecture 22 16

  17. Proof of approximation ∗ • � �∈ � ∗ • � � • Plugging into , ∗ ∗ � � �∈ � • Plugging into , we get 15896 Spring 2016: Lecture 22 17

  18. Why MD? Olympic Badminton! http://youtu.be/hdK4vPz0qaI 15896 Spring 2016: Lecture 22 18

  19. 15896 Spring 2016: Lecture 22 19

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