Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-10-12
2004-04-06
Pwu, Jeffrey (Department: 3628)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
Reexamination Certificate
active
06718312
ABSTRACT:
FIELD OF INVENTION
The present invention relates to computer implementations of simultaneous auctions of multiple items, wherein combinatorial bidding is permitted. More particularly, the present invention involves the use of bid composition restrictions to pace such auctions and to eliminate certain damaging strategic manipulations that have been used by bidders in such auctions.
BACKGROUND OF INVENTION
I. Prelude: Simultaneous Bidding in the FCC Spectrum Auctions
Since 1994, when the U.S. Federal Communications Commission (FCC) adopted the simultaneous ascending auction. (“SAA”, also known as the “simultaneous multiple round auction,” as its primary auction method, more than $20 billion of radio spectrum has been sold using this method. Initial public reaction to the spectrum auctions was enthusiastic. A 1995 New York Times article describing the FCC's auction of spectrum for personal communications services carried the headline: “The Greatest Auction in History.” A balanced review by the Congressional Budget Office gave the whole series of FCC auctions high marks for both novelty and successful outcomes.
Although the SAA incorporates significant new elements, some of its rules resemble those of the well-known “silent auctions” commonly used in charity sales. In silent auctions, tables are filled with the multiple lots to be sold (or pictures or descriptions of the items), and bidders write their bids in a list on a page beside each lot.
Like the silent auction, the SAA is a simultaneous sale of multiple items in which bidding closes for all the items at the same time: However, the SAA differs from the silent auctions in several ways. First, at least in the variant used by the FCC, SAA bids are submitted in a series of discrete rounds rather than continuously in time. Second, the SAA typically employs a computerized interface that makes it practical to run the auction remotely (for example, by a dial-in system or over the Internet), which in turn makes its practical to extend the auction over a long period of time. When an electronic implementation is used, it also enables bidders to keep track of bidding on many related items in a simple manner. Third and most important, the SAA incorporates some rules that are distinctly different from the silent auction. Among these are the closing rule that keeps bidding open for all items until there is a sufficient period with no new bidding for any item, the activity rule that prevents a bidder from refraining from active bidding until near the end of the auction, and the bid increment rule that controls the pace of the auction by determining appropriate minimum bid increments.
The FCC has conducted simultaneous ascending auctions for as few as ten or as many as 2,000 spectrum licenses. Although most SAAs conducted to date have been spectrum sales, SAAs have been run successfully in several countries for a wide variety of assets and contract obligations, including undeveloped real estate, mining rights, and standard offer electrical service obligations.
To fully appreciate the contribution of the present invention, it is important to understand: a) economic auction theory, b) the mechanics of combinatorial auctions, and c) prior art bid restrictions, i.e., additive activity rules.
II. Economic Auction Theory
A. Efficiency as the Objective of Auction Designs
In a seller's auction, an allocation of goods is economically “efficient” if the overall value—consisting of the price received by the seller plus the net value received by the winning bidders—is as large as possible. (Buyer's auctions have an analogous standard.) Economic efficiency is a fundamental objective of both public and private sector auction sales and overall value is a key criterion for evaluating auction performance.
When governments sell assets, economic efficiency is often listed as an objective of the auction. In the U.S. spectrum auctions, federal legislation specified that “efficient use of the electromagnetic spectrum” was the primary objective of the allocation process. The FCC's initial auction order explicitly interpreted this legislative objective to mean economically efficient use. Similarly, the sales of SO
2
pollution permits and airport landing rights also have economic efficiency as a primary objective.
In most private sector auctions and in some public sector auctions, the seller instead specifies maximizing revenues as the main objective of the sale. However, maximizing revenues requires attracting potential bidders to participate and compete, which in turn requires holding out the possibility of significant profits for the winning bidder. According to the economics literature, the connection between participation and the winner's potential profits is so strong that it sometimes makes the problem of revenue maximization identical to the problem of overall value maximization. In practice, this justifies the rule of thumb that more efficient designs lead to higher auction revenues in seller's auctions.
B. Classical Auction Theory
The idea that concurrent bidding for multiple goods helps to find market-clearing prices and their associated efficient allocations has a long history in economic thought, dating back to the 19
th
Century. At that time, economists recognized that the demand for one good would generally depend on the prices of other goods. For example, the quantity of wheat demanded at a given price would generally depend on the prices of other grains and perhaps also on the prices of other foods, as well as on the cost of milling services, transportation, storage, and so on.
Although early economic thinkers understood that market-clearing prices of different goods could not be found individually without reference to one another, they offered no practical means to discover and set such prices. The Walrasian auction, which was central to economic theories about price setting, is a dynamic process in which the price of each good may increase or decrease at different times during the auction. The non-monotonic behavior of prices in the Walrasian auction can interfere with the convergence of the process, as published examples in the economics literature have shown. Even when convergence does theoretically occur, it can be very slow because some prices will rise and fall many times before approaching their final values. Finally, the convergence or the speed of convergence of the Walrasian auction process is not something that is guaranteed. Rather, it is a prediction based on assumptions about the participants' behavior—assumptions that are contrary to the incentives of the participants and which are thus unlikely to be satisfied in reality. Consequently, although classical economic analysis was useful in identifying weaknesses in non-simultaneous price setting, it ultimately had little to contribute to the implementation of real auctions for multiple goods.
C. Recent Auction Theory
Recent scholarly research does contain ideas that are useful for designing and implementing real auctions for multiple goods. For example, it has recently been shown that a simultaneous ascending auction leads to market-clearing prices and supports economically efficient allocations if the goods offered for sale are mutual substitutes and the bidders always bid straightforwardly for the goods they want. [Two goods are “substitutes” if raising the price of one increases (or at least never reduces) demand for the other; goods are mutual substitutes if each good is a substitute for every other good in the set. For example, apples and pears are substitutes. If the price of apples were to rise significantly, some consumers would buy pears instead, thereby increasing the total demand for pears. Similarly, apples, pears, and bananas are “mutual substitutes.” A bidder bids “straightforwardly” in a round when he bids as if he were the sole remaining active bidder, with all other bidders expected to make no more bids.]
The SAA also has the very desirable property that no price can ever decrease during the course of the auction. This mon
McAfee R. Preston
Milgrom Paul
Market Design Group, Inc.
Pwu Jeffrey
Skadden, Arps Slate Meagher & Flom LLP
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