Sequential Auctions with Multiple Synergies

Journal: International Game Theory Review

Auctions are increasingly being used to allocate public resources. For example, the Indian government uses auctions to sell spectrum rights, procure contracts for infrastructure projects, etc.  Since 2008, exciting auctions have taken place for various professional sports tournaments like the Indian Premier League (IPL). Such auctions are used to allocate players among the competing teams. All the auctions described above are examples of multi-object auction. As the name suggests, a multi-object auction involves the sale of more than one object. These auctions are quite complex as well as interesting in nature, with great opportunities to derive insights and strategies for multiple stakeholders.

Auction theorists have devised several multi-object auction formats with desired properties, but often, they are not well-suited for real-life adaptations. Hence, in practice, the use of simple formats like the sequential auction is favoured. A sequential auction format involves the sale of multiple objects one after the other. Although this format is easier to manage, its properties are difficult to study. Our understanding of the dynamics of this format is poorer when the objects being auctioned are synergistically related to one another. For example, when the objects being auctioned are complementary or substitutes. The popular IPL auction is a good real-life example. 

In the IPL, cricket players’ services are auctioned via the sequential auction format. Since a cricket team requires players with different skills (batting, bowling, fielding, etc.) to be successful, each IPL team wants to recruit players with different skillsets. Therefore, they treat players with different skillsets as complementary, and those with the same skillset as substitutes. One can assert that players with the same skillset, i.e., players who are treated as substitutes, belong to the same category. Our knowledge of the dynamics of such a complicated auction scenario is ordinary at best. By gaining a better understanding, one can improve the chances of obtaining favourable outcomes. The current study is a step in that direction.

One of the most desirable properties of an auction mechanism is its efficiency. An auction mechanism is said to be efficient if it allocates the object to a buyer who values it the most. Obtaining efficient outcomes in a sequential auction is one of the many challenges with this widely used auction mechanism, especially when the objects being auctioned are synergistically related as is the case with the IPL auction. 

In this paper, the authors address this challenge by showing that efficient outcomes are achieved when more valuable objects are auctioned first in each category. Based on the results of their research, they recommend that organizers of the IPL auction abandon the policy of auctioning players randomly and choose the order of sale in such a way that players who are perceived as more valuable by IPL teams are auctioned first.