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The MyersonSatterthwaite Theorem Game Theory Course: Jackson, Leyton-Brown & Shoham Game Theory Course: Jackson, Leyton-Brown & Shoham The MyersonSatterthwaite Theorem . . Efficient Trade People have private information

  1. The Myerson–Satterthwaite Theorem Game Theory Course: Jackson, Leyton-Brown & Shoham Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  2. . Efficient Trade • People have private information about the utilities for various exchanges of goods at various prices. • Can we design a mechanism that always results in efficient trade? • Are strikes unavoidable? Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  3. . Simple Exchange Setting • Exchange of a single unit of an indivisible good • Seller initially has the item and has a value for it of θ S ∈ [0 , 1] • Buyer has need for the item and has a value for it of θ B ∈ [0 , 1] Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  4. . An Example • The buyer’s value is equally likely to be either .1 or 1 • The seller’s value for the good is equally likely to be 0 or .9 • Trade should take place for all combinations of values except (.1,.9) Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  5. The seller should say a price of either .1 or 1 (presume that buyer says yes when indifferent) When the seller’s value is 0: price of .1 leads to sale for sure: expected utility .1, price of 1 leads to sale with probability 1/2, expected utility of 1/2. Better to set the high price. Inefficient trade: (.1, 0) do not trade What about other mechanisms? . An Example of a Mechanism • The seller announces a price in [0,1] • The buyer either buys or not at that price. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  6. price of .1 leads to sale for sure: expected utility .1, price of 1 leads to sale with probability 1/2, expected utility of 1/2. Better to set the high price. Inefficient trade: (.1, 0) do not trade What about other mechanisms? . An Example of a Mechanism • The seller announces a price in [0,1] • The buyer either buys or not at that price. • The seller should say a price of either .1 or 1 (presume that buyer says yes when indifferent) • When the seller’s value is 0: Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  7. price of 1 leads to sale with probability 1/2, expected utility of 1/2. Better to set the high price. Inefficient trade: (.1, 0) do not trade What about other mechanisms? . An Example of a Mechanism • The seller announces a price in [0,1] • The buyer either buys or not at that price. • The seller should say a price of either .1 or 1 (presume that buyer says yes when indifferent) • When the seller’s value is 0: • price of .1 leads to sale for sure: expected utility .1, Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  8. Better to set the high price. Inefficient trade: (.1, 0) do not trade What about other mechanisms? . An Example of a Mechanism • The seller announces a price in [0,1] • The buyer either buys or not at that price. • The seller should say a price of either .1 or 1 (presume that buyer says yes when indifferent) • When the seller’s value is 0: • price of .1 leads to sale for sure: expected utility .1, • price of 1 leads to sale with probability 1/2, expected utility of 1/2. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  9. What about other mechanisms? . An Example of a Mechanism • The seller announces a price in [0,1] • The buyer either buys or not at that price. • The seller should say a price of either .1 or 1 (presume that buyer says yes when indifferent) • When the seller’s value is 0: • price of .1 leads to sale for sure: expected utility .1, • price of 1 leads to sale with probability 1/2, expected utility of 1/2. • Better to set the high price. • Inefficient trade: (.1, 0) do not trade Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  10. . An Example of a Mechanism • The seller announces a price in [0,1] • The buyer either buys or not at that price. • The seller should say a price of either .1 or 1 (presume that buyer says yes when indifferent) • When the seller’s value is 0: • price of .1 leads to sale for sure: expected utility .1, • price of 1 leads to sale with probability 1/2, expected utility of 1/2. • Better to set the high price. • Inefficient trade: (.1, 0) do not trade • What about other mechanisms? Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  11. . Efficiency, Budget Balance and Individual Rationality . Theorem (Myerson–Satterthwaite) . There exist distributions on the buyer’s and seller’s valuations such that: There does not exist any Bayesian incentive-compatible mechanism is simultaneously efficient, weakly budget balanced and interim individual . rational. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  12. Let us show the proof based our example: The buyer’s value is equally likely to be either .1 or 1 The seller’s value for the good is equally likely to be 0 or .9 Trade should take place for all combinations of values except (.1,.9) . Proof • Can get efficient trades for some distributions: • Suppose the buyers value is always above v and the sellers value is always below v . • Mechanism: always exchange the good, and at the price p B ( θ B ) = v = − p S ( θ S ) . • Satisfies all of the conditions. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  13. . Proof • Can get efficient trades for some distributions: • Suppose the buyers value is always above v and the sellers value is always below v . • Mechanism: always exchange the good, and at the price p B ( θ B ) = v = − p S ( θ S ) . • Satisfies all of the conditions. • Let us show the proof based our example: • The buyer’s value is equally likely to be either .1 or 1 • The seller’s value for the good is equally likely to be 0 or .9 • Trade should take place for all combinations of values except (.1,.9) Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  14. . Proof • Show the proof for fully budget balanced trade that is ex post individually rational. Extension of the proof is easy (you can do it!) • Trade should take place for all combinations of values except ( θ B , θ S ) = ( . 1 , . 9) . • Budget balance: we can write payments as a single price p ( θ B , θ S ) (payment made by buyer, received by the seller) • Weak budget balance: you can extend the proof - noting that the payment made by the buyer has to be at least that received by the seller. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  15. (2) by individual rationality of the buyer. (3) by individual rationality of both the buyer and the seller. (4) incentive compatibility for seller of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . incentive compatibility for buyer of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . So: and - impossible! . Proof • (1) p (1 , . 9) ≥ . 9 by individual rationality of the seller. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  16. (3) by individual rationality of both the buyer and the seller. (4) incentive compatibility for seller of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . incentive compatibility for buyer of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . So: and - impossible! . Proof • (1) p (1 , . 9) ≥ . 9 by individual rationality of the seller. • (2) p ( . 1 , 0) ≤ . 1 by individual rationality of the buyer. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  17. (4) incentive compatibility for seller of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . incentive compatibility for buyer of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . So: and - impossible! . Proof • (1) p (1 , . 9) ≥ . 9 by individual rationality of the seller. • (2) p ( . 1 , 0) ≤ . 1 by individual rationality of the buyer. • (3) p ( . 1 , . 9) = 0 by individual rationality of both the buyer and the seller. Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

  18. incentive compatibility for seller of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . incentive compatibility for buyer of type not wanting to pretend to be : , which implies by (1), (2), (3) that or . So: and - impossible! . Proof • (1) p (1 , . 9) ≥ . 9 by individual rationality of the seller. • (2) p ( . 1 , 0) ≤ . 1 by individual rationality of the buyer. • (3) p ( . 1 , . 9) = 0 by individual rationality of both the buyer and the seller. • (4) p (1 , 0) =? Game Theory Course: Jackson, Leyton-Brown & Shoham The Myerson–Satterthwaite Theorem .

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