The private value single item bisection auction (Q852323)

This paper presents and studies a new iterative auction, called bisection auction, which can be used for the sale of a single indivisible object. The authors propose a full game-theoretic analysis for the equilibrium properties of the bisection auction using as model a non-cooperative game in extensive form with imperfect information. The main results obtained can be stated as follow: (a) In the bisection auction, threshold strategies are sufficient from a strategic point of view. (b) The strategic equivalence of the bisection auction and the Vickrey auction (and hence to the English auction) is proved. (c) The bisection auction is incentive compatible, i.e. truth-telling is a weakly dominant strategy. This implies that when everyone tells the truth is efficient in the sense that the player with the highest valuation gets the bidet object. While being strategically equivalent to the Vickrey and English auctions, the bisection auction outperforms them since it needs fewer rounds than the English auction and causes less information to be revealed than the Vickrey auction. In the Vickrey auction, all players need to reveal their valuation, while for the English auction all bidders, except the bidder with the highest valuation, need to reveal their valuation. In the bisection auction, only the bidder with the second highest valuation has to reveal his valuation, all other bidders only reveal their valuation up to a precision required to determine the winner and the precise value of the second highest valuation. Moreover, the procedure used in the bisection auction guarantees a fast and predictable termination, in contrast to the English auction which is on average relatively show if it uses unit increments and risks inefficient allocations if it uses larger increments.