Discrete single-parameter optimal auction design (Q7034814)

The authors study the classic single-item auction setting of Myerson, but under the assumption that the buyers' values for the item are distributed over finite supports. More precisely, using strong LP duality and polyhedral theory, the authors rederive various key results regarding the revenue-maximizing auction, including the characterization through virtual welfare maximization and the optimality of deterministic mechanisms, as well as a novel, generic equivalence between dominant-strategy and Bayesian incentive compatibility. The authors characterize the optimal auctions of more general systems as generalized virtual welfare maximizers, by making use of their KKT conditions, and present an analogue of Myerson's payment formula for general discrete single-parameter auction settings. It is shown that total unimodularity of the feasibility space is a sufficient condition to guarantee the optimality of auctions with integral allocation rules.\N\NFinally, the authors demonstrate this KKT approach by applying it to a setting where bidders are interested in buying feasible flows on trees with capacity constraints, and provide a combinatorial description of the (randomized, in general) optimal auction. Section 3 includes the rederivation of the key components of Myerson's theory for single-item revenue-maximization, but for finite-support distributions, as well as some novel results. General virtual welfare maximization is considered in Section 4.2.\N\NFor the entire collection see [Zbl 1553.91015].