Game Theory and the Design of Electronic Markets

1. Game Theory and the Design of Electronic Markets Sriharsha Hammika

2. 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.

3. 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.

4. 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

5. 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

6. 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.

7. 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.

8. 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

9. Uses of Game Theory • Political Science • Economics and Business • Biology • Computer Science and Logic • Philosophy • Sociology • and many other fields

10. 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

11. 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.

12. 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.

13. 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.

14. 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).

15. 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

16. 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.

17. 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.

18. 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 <$1 for a single slot). • Payment is made on a pay-per-click (PPC) rather than a per-impression basis.

19. 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.

20. 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 (Yahoo’s) auction design was the winning bids were posted. • This resulted in instability.

21. 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 C+2& would be sufficient to win slot one and lowers the bid. • Now, B can increase the bid to C+3& 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.

22. 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.

23. 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 advertiser’s bid amount, expected click – through rate.

24. 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.

25. 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).

26. 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.

27. 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.

28. Conclusion • Electronic commerce promises to reshape the world’s 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.