Game Theory and the Design of Electronic Markets

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Game Theory and the Design of Electronic Markets

• Sriharsha Hammika

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Game Theory!!!

• Game Theory is not about the usual computer
  games.
• Game theory is the study of decision making among
  multiple agents (human or software).
• Decisions are made in order to maximize the
  returns.
• In a game the decision of all agents jointly
  determine the outcome.
• Agents may be individuals, groups, firms or any
  combination of these.

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History of Game Theory

• John Von Neumann 1903 1957.
• Book - Theory of Games and Economic Behavior.
• John Forbes Nash 1928
• Popularized Game Theory with his Nash Equilibrium
  (won Noble prize).
• A Beautiful Mind movie.

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Game Theory

• Games are well-defined mathematical models.
• Game consists of a set of players and a set of
  moves.
• Types of Games
• Symmetric and Asymmetric
• Zero sum and non-zero sum
• Simultaneous and sequential
• Perfect Information and imperfect information
• Infinitely long games

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Types of Games

• Symmetric
• Payoffs for a particular strategy depend only on
  other strategies employed.
• Payoffs do not depend on the person playing the
  game.
• Chicken, Prisoners dilemma
• Asymmetric
• No identical strategy set for both the players
• Payoffs depend on the person playing the game

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Types of Games

• Zero sum
• Special case of constant sum games.
• Choices by players can neither increase nor
  decrease the available resources.
• Poker
• Non-zero sum
• Most of the games studied by game theorists are
  non-zero sum.
• Some outcomes have net results greater than or
  less than zero.

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Types of Games

• Simultaneous
• Both players move simultaneously
• Later player is not aware of earlier players
  actions
• Sequential
• Also called as dynamic games
• Players have knowledge (maybe little) about other
  players actions.

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Types of Games

• Perfect Information
• All players know the moves previously made by all
  other players.
• Only sequential games can be games of perfect
  information
• Chess
• Imperfect Information
• Players do not know the previous moves of other
  players

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Uses of Game Theory

• Political Science
• Economics and Business
• Biology
• Computer Science and Logic
• Philosophy
• Sociology
• and many other fields

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Auctions

• An Auction is the process of buying and selling
  things by offering them up for bid, taking bids
  and then selling it to the highest bidder.
• Can be of two types
• Reserve Auctions
• Minimum reserve amount
• Absolute Auctions
• No reserve amount

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Primary Types of Auctions

• English Auction
• Used in English Auction Houses.
• Participants bid openly against each other.
• Usually has a reserve prize.
• Auctioned till a buy-out price is reached.
• Dutch Auction
• Auctioneer begins with a high asking price.
• Price lowered until some participant is willing
  to accept the price.

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Few more types of Auctions

• Sealed bid first price auction
• Also known as Sealed High-Bid auction
• First-Price Sealed Bid Auction ( FPSB ).
• All bidders submit bids simultaneously.
• Closed bidding.
• Sealed bid second price auction
• Also known as Vickery Auction.
• Similar to FPSB Auction.
• Winning bidder pays the second highest bid.

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Electronic Consumer Auctions

• Important feature of electronic commerce.
• Auctions made online and electronically.
• Amazon, eBay and any online bidding websites.
• High revenues made by these auctions.

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eBay

• Electronic Auction house
• Founded on September 3, 1995 by programmer Pierre
  Omidyar as Auction Web.
• Ascending auction which terminates at a fixed
  time.
• Proxy Bidders are used.
• Willingness to Pay (WTP).

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Problem of Sniping in eBay

• Sniping is a disadvantage of eBay bidding
  strategy.
• Manual bidders act as snipers.
• eBay will increase your amount till it reaches
  the WTP.
• What if all the bidders were snipers???
• The auction would become similar to sealed bid
  auctions

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Amazon

• Implements the going, going, gone feature of live
  auctions.
• Whenever a bid is cast in the last 10 minutes
  then the bid is extended by another 10 minutes.
• Sniping is prevented.
• Amazon style auctions have been observed to be
  more efficient.

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Sponsored Search Auctions

• Search engines sell keywords.
• Before internet the advertising pricing model was
  based on cost per thousand impressions ( CPM ).
• This model well suited to more traditional media
  such as television, newspapers and magazines.

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Yahoo!

• In 1997, Overture (now Yahoo Search Marketing)
  launched an innovative framework.
• The major features are
• Each keyword was sold via its own auction (prices
  were as low as lt1 for a single slot).
• Payment is made on a pay-per-click (PPC) rather
  than a per-impression basis.

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Yahoo!

• Many inexpensive, perishable goods namely
  keywords for searches were auctioned.
• Many positions for the keyword were auctioned.
• Positions at the top of the page were auctioned
  for more.

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Yahoo!

• The mechanism has been characterized as
  generalized first price auction (GFP ).
• Highest bidder wins the first slot followed by
  the second highest bidder for the next slot and
  so on.
• The major disadvantage of Overture (Yahoos)
  auction design was the winning bids were posted.
• This resulted in instability.

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Instability in Overture design

• Three bidders A,B,C bidding for three slots.
• A wins for WTP(A) followed by B then by C.
• B realizes that only C would be sufficient to
  win slot two and lowers the bid.
• A realizes that only C2 would be sufficient to
  win slot one and lowers the bid.
• Now, B can increase the bid to C3 to win slot
  one and A increases his bid
• This situation continues until B reaches his WTP
  and then he lowers back to C and the cycle
  begins again.

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Google

• Google launched its AdWords Select program in
  2000.
• Google uses Generalized second price auction
  (GSP) mechanism.
• The highest bidder wins the first slot but pays
  the second highest amount for the first slot.
• This reduces the instability problem of the GFP
  auction.

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AdWords

• Pay Per Click (PPC) instead of CPM.
• The advertising slots are allocated in the
  decreasing order of revenue rather than
  decreasing order of bids.
• Revenue is calculated based on the advertisers
  bid amount, expected click through rate.

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Trading Agent Competition

• Annual Competition hosted by Association for
  Trading Agent Research.
• TAC provides means of evaluating and comparing
  research methods in agent based online bidding.
• Software agents are rapidly replacing humans in
  online auctions.
• Advantages of using Agents
• Systematically monitor a wide variety of
  auctions.
• Make rapid decisions about bidding.
• Can do this continuously and repetitively without
  losing concentration.

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TAC

• Purpose of TAC
• Evaluate agent strategies in a simulated
  electronic market.
• Evaluate market designs, given a group of trading
  agents.
• Two running versions of TAC are
• TAC Travel
• TAC Supply Chain Management (SCM).

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TAC Travel

• Travel goods (flights, hotels and entertainment
  tickets) are sold.
• Each agent acts on behalf of one of the clients
  and bids as per the clients preferences.

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TAC SCM

• Was designed to capture many of the challenges
  involved in supporting dynamic supply chain
  practices.
• Agents buy raw materials from suppliers and sell
  finished goods to customers.

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Conclusion

• Electronic commerce promises to reshape the
  worlds economy.
• A lot of research is being made in the field of
  Algorithmic Game Theory.
• Electronic market mechanisms should be evaluated
  based on game theory prior to their release.
• Also called as Computational Mechanism design as
  it overlaps with both game theory and computer
  science.
• Better market designs will do a better job of
  matching buyers and sellers, ultimately enhancing
  the welfare of the society.