Diffusion auction design with transaction costs

Abstract

We study multi-unit auctions powered by intermediated markets, where all transactions are processed by intermediaries and incur certain costs. Each intermediary in the market owns a private set of buyers and all intermediaries are networked with each other. Our goal is to incentivize the intermediaries to share the auction information to individuals they can reach, including their private buyers and neighboring intermediaries, so that more potential buyers are able to participate in the auction. To this end, we build a diffusion-based auction framework to handle the transaction costs and the strategic interactions between intermediaries. The classic Vickrey-Clarke-Groves (VCG) mechanism within the scenario can obtain the maximum social welfare, but it can decrease the seller's revenue or even lead to a deficit. To overcome the revenue issue, we develop two deficit reduction strategies, based on which a family of diffusion auctions called Critical Neighborhood Auctions (CNA) is identified. The CNA not only maximizes the social welfare, but also eliminates all the seller's deficits. Moreover, the revenue given by the CNA is no less than the revenue given by the VCG mechanism with/without intermediaries. This is the first set of diffusion auctions with welfare and revenue advantages that can handle multiple items and transaction costs.