Characterizing the Vickrey combinatorial auction by induction (Q2385108)

The general purpose of this paper is to study the allocation of heterogeneous commodities to agents whose private values for the combinations of these values are monotonic by inclusion. Using advanced mathematical techniques and requiring the domains to be smoothly connected (a condition which is not straightforward to be verified), \textit{B. Holmström} [Econometrica 47, 1137--1144 (1979; Zbl 0411.90004)] proved that the Vickrey combinatorial auction can be characterized as the unique, efficient, strategy-proof, and individually rational allocation rule. The particular aim of this article is to provide an simpler, alternative proof to Holmström's [loc. cit.] characterization theorem of the Vickrey combinatorial auction by employing induction logic, without involving differentiality, and applying to nonconvex domains which may not be smoothly connected (a class of value profiles is called convex if any convex combination of two functions in the class remains in the same class). The novel approach is elementary, not involving the smoothness condition, and intuitive in the sense that familiar properties of the single-item second-price auction provide the first step for the induction on the number of auctioned items. The proposed method suggests new possible characterizations of other allocation mechanism, including various forms of simultaneous ascending auctions.