![Page 1: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/1.jpg)
How to Achieve Society's Goals:
The Mechanism Design Solution
Swaprava Nath
Game Theory LabDepartment of Computer Science and Automation
Indian Institute of Science, Bangalore
CSA Undergraduate Summer School, 2013
![Page 2: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/2.jpg)
Outline
Motivation
Game Theory Review
Mechanism Design
References
![Page 3: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/3.jpg)
Sponsored Search Auction
Ever wondered how Google makes money?
![Page 4: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/4.jpg)
Sponsored Search Auction (Contd.)
Google asks for a sealed bid from the advertisers
● Run an auction on those bids
● The auction is Generalized Second Price Auction
● This mechanism is efficient for a single slot
➔ Slot goes to the bidder who values it most
● It is also truthful
● Bidders participate voluntarily in this auction
![Page 5: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/5.jpg)
Stable Matching
![Page 6: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/6.jpg)
Stable Matching (Contd.)
● Each player has a order of preferences among the alternatives on the other side of the market
● Goal: finding a stable match
● Stable match: no agent can improve their current match
● A stable match always exists (Gale – Shapley 1962)
![Page 7: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/7.jpg)
Stable Matching (Contd.)
● Each player has a order of preferences among the alternatives on the other side of the market
● Goal: finding a stable match
● Stable match: no agent can improve their current match
● A stable match always exists (Gale – Shapley 1962)
Nobel Prize in Economics, 2012
![Page 8: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/8.jpg)
Stable Matching (Contd.)
● Each player has a order of preferences among the alternatives on the other side of the market
● Goal: finding a stable match
● Stable match: no agent can improve their current match
● A stable match always exists (Gale – Shapley 1962)
Nobel Prize in Economics, 2012
Lloyd S. Shapley Alvin E. Roth
"for the theory of stable allocations and the practice of market design"
![Page 9: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/9.jpg)
DARPA Red Balloon Challenge, 2009
DARPA Network Challenge Project Report. In http://archive.darpa.mil/networkchallenge/, 2010.
Reward:$40,000 for locating all 10 balloons
![Page 10: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/10.jpg)
MIT winning team's strategy
G. Pickard,W. Pan, I. Rahwan, M. Cebrian, R. Crane, A. Madan, and A. Pentland. Time-critical Social Mobilization. Science, 334:509–512, 2011.
● The team crowdsource the information about the balloon
● Reward the chain that finds the balloon
● The payment scheme is geometric
![Page 11: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/11.jpg)
MIT winning team's strategy
G. Pickard,W. Pan, I. Rahwan, M. Cebrian, R. Crane, A. Madan, and A. Pentland. Time-critical Social Mobilization. Science, 334:509–512, 2011.
● The team crowdsource the information about the balloon
● Reward the chain that finds the balloon
● The payment scheme is geometric
Want to know more?
Come t
o the ta
lk on
June 2
8 (this
Fri) a
t
4.30 P
M to CSA
252 for
my the
sis coll
oquium
![Page 12: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/12.jpg)
Reviewing Game Theory
![Page 13: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/13.jpg)
Tools from Microeconomics
Game Theory
Mathematical study of conflict and cooperation among rational and intelligent agents.
● Rational agents maximize their (expected) utilities● Intelligent players make optimal moves given a game
➔ This helps in understanding the moves of an institution➔ Predictive approach
Mechanism Design
“Engineering” approach to Economic Theory
➔ Start with a goal or social objective➔ Design institutions (mechanisms) to achieve these goals➔ Prescriptive approach
![Page 14: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/14.jpg)
The Prisoner's Dilemma Game
Confess Remain Silent
Confess -5 , -5 0 , -20
Remain Silent -20 , 0 -1 , -1
Dominant Strategy:Player's payoff is always at least as high as any other strategy irrespective of what other player(s) play
A strategy profile (s, s) is Dominant Strategy Equilibrium, if both s and s are Dominant
s1, s2
![Page 15: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/15.jpg)
Neighboring Country's Dilemma
Tension, Tension Capture, Devastation
Devastation, Capture Prosper, Prosper
![Page 16: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/16.jpg)
Bach or Stravinsky Game
2,1 0,0
0,0 1,2
![Page 17: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/17.jpg)
Matching Pennies Game
1,-1 -1,1
-1,1 1,-1
![Page 18: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/18.jpg)
Mechanism Design
![Page 19: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/19.jpg)
Example 1: Fair Division
Kid 1Rational and
Intelligent
Kid 2Rational and
Intelligent
MotherSocial PlannerMechanism Designer
![Page 20: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/20.jpg)
Example 1: Fair Division
Kid 1Rational and
Intelligent
Kid 2Rational and
Intelligent
MotherSocial PlannerMechanism Designer
Question: how to divide the cake so that each kid is happy with his portion?
![Page 21: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/21.jpg)
Fair Division Problem (Contd.)
Kid 1 thinks he got at least halfKid 2 thinks he got at least half
This is called a fair division
Notions of fairness is subjective
If the mother knows that the kids see the division the same way as she does, the solution is simple
She can divide it and give to the children
![Page 22: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/22.jpg)
Fair Division Problem (Contd.)
What if Kid 1 has a different notion of equality than that of the mother
Mother thinks she has divided it equallyKid 1 thinks his piece is smaller than Kid 2's
Difficulty:Mother wants to achieve a fair divisionBut does not have enough information to do this on her ownDoes not know which division is fair
Question:Can she design a mechanism under the incomplete knowledge that achieves fair division?
![Page 23: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/23.jpg)
Fair Division Problem (Contd.)
Solution:
Ask Kid 1 to divide the cake into two piecesAsk Kid 2 to pick his piece
Why does this work?
● Kid 1 will divide it into two pieces which are equal in his eyes✔ Because if he does not, Kid 2 will pick the bigger piece✔ So, he is indifferent among the pieces✔ HAPPY
● Kid 2 will pick the piece that is bigger in his eyes✔ HAPPY
![Page 24: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/24.jpg)
Alice Bob Carol Dave
Example 2: Voting
Four candidates compete in a vote
![Page 25: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/25.jpg)
Alice Bob
7 Voters
Carol Dave
Voting (Contd.)
Four candidates compete in a vote
![Page 26: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/26.jpg)
Alice Bob
7 Voters
3 Voters
A > D > B > C
2 Voters
C > D > B > A
Carol Dave
Voting (Contd.)
Four candidates compete in a vote
2 Voters
B > A > C > D
![Page 27: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/27.jpg)
Alice Bob
7 Voters
3 Voters
A > D > B > C
2 Voters
C > D > B > A
Who should win?
Carol Dave
Voting (Contd.)
Four candidates compete in a vote
2 Voters
B > A > C > D
![Page 28: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/28.jpg)
Alice Bob
7 Voters
3 Voters
A > D > B > C
2 Voters
C > D > B > A
Alice (plurality rule!)
Carol Dave
Voting (Contd.)
Four candidates compete in a vote
2 Voters
B > A > C > D
![Page 29: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/29.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● Give each of the voters a ballot● Ask to pick one candidate● Run the Plurality Rule
![Page 30: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/30.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● Give each of the voters a ballot● Ask to pick one candidate● Run the Plurality Rule● Alice wins!
![Page 31: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/31.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● Give each of the voters a ballot● Ask to pick one candidate● Run the Plurality Rule● Alice wins!● But voters are strategic● Notice the preferences of the last 2 voters● They prefer B over A
![Page 32: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/32.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: B > C > D > A
● Give each of the voters a ballot● Ask to pick one candidate● Run the Plurality Rule● Alice wins!● But voters are strategic● Notice the preferences of the last 2 voters● They prefer B over A● Can manipulate to make Bob the winner
Maybe the voting rule is flawed?
![Page 33: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/33.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● How about a different voting rule● Ask the voters to submit the whole preference
profile● Give scores to the ranks:
✔ n-1 for top, n-2 for the next, … , 0 to the last✔ Here n = 4
![Page 34: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/34.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● How about a different voting rule● Ask the voters to submit the whole preference
profile● Give scores to the ranks:
✔ n-1 for top, n-2 for the next, … , 0 to the last✔ Here n = 4
● Borda voting (1770)
![Page 35: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/35.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● How about a different voting rule● Ask the voters to submit the whole preference
profile● Give scores to the ranks:
✔ n-1 for top, n-2 for the next, … , 0 to the last✔ Here n = 4
● Borda voting (1770)● A = 13, B = 11, C = 8, D = 10● Alice wins!
![Page 36: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/36.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● How about a different voting rule● Ask the voters to submit the whole preference
profile● Give scores to the ranks:
✔ n-1 for top, n-2 for the next, … , 0 to the last✔ Here n = 4
● Borda voting (1770)
Is it manipulable?
![Page 37: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/37.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
● How about a different voting rule● Ask the voters to submit the whole preference
profile● Give scores to the ranks:
✔ n-1 for top, n-2 for the next, … , 0 to the last✔ Here n = 4
● Borda voting (1770)
Yes
![Page 38: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/38.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: B > C > D > A
● How about a different voting rule● Ask the voters to submit the whole preference
profile● Give scores to the ranks:
✔ n-1 for top, n-2 for the next, … , 0 to the last✔ Here n = 4
● Borda voting (1770)● A = 13, B = 15, C = 6, D = 8● Bob wins!
![Page 39: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/39.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
Question: Can we design any truthful voting scheme that is socially optimal?
![Page 40: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/40.jpg)
Voting (Contd.)
3 Voters: A > D > B > C2 Voters: B > A > C > D2 Voters: C > D > B > A
Question: Can we design any truthful voting scheme that is socially optimal?
Answer: No (unfortunately)!
Gibbard (1973) – Satterthwaite (1975) TheoremWith unrestricted preferences and three or more distinct alternatives, no rank order voting system can be unanimous, truthful, and non-dictatorial
Allan Gibbard Mark Satterthwaite
![Page 41: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/41.jpg)
Example 3: Auction
Player 1
Metropolitan Museum of Art
Player 2
Musée du Louvre
Two art collectors bidding for a painting
![Page 42: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/42.jpg)
Auction (Contd.)
Goal of the auctioneer:
● To allocate the painting to the agent who values it the most● But does not know how much each agent values it● Solving an optimization problem with private information
The auctioneer can ask the agents to bid for the painting
Question: what mechanism should be implemented to achieve the auctioneers goal?
i.e., the painting goes to the agent who values it the most
![Page 43: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/43.jpg)
Attempt 1: First Price Auction
Highest bidder gets the painting, pays his/her bid
![Page 44: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/44.jpg)
Attempt 1: First Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5
Highest bidder gets the painting, pays his/her bid
![Page 45: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/45.jpg)
Attempt 1: First Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5
Highest bidder gets the painting, pays his/her bid
True bidding:
Metropolitan wins the auction, but pays 12
Net payoff = 12 – 12 = 0
![Page 46: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/46.jpg)
Attempt 1: First Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5
Highest bidder gets the painting, pays his/her bid
Strategic bidding:
Metropolitan could bid 10.01 and could still win the auction
Net payoff = 12 – 10.01 = 1.99
![Page 47: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/47.jpg)
Attempt 1: First Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5
Highest bidder gets the painting, pays his/her bid
Conclusion:
First Price Auction is not truthful
![Page 48: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/48.jpg)
Attempt 2: Second Price Auction
Highest bidder gets the painting, pays the next highest bid
![Page 49: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/49.jpg)
Attempt 2: Second Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5
True bidding:
Metropolitan wins, but pays 10
Net payoff = 12 – 10 = 2
Highest bidder gets the painting, pays the next highest bid
![Page 50: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/50.jpg)
Attempt 2: Second Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5No other bid dominates this payoff
Metropolitan can only lose by underbidding
Highest bidder gets the painting, pays the next highest bid
![Page 51: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/51.jpg)
Attempt 2: Second Price Auction
Metropolitan Louvre9
9.5
10
10.5
11
11.5
12
12.5Conclusion:
Second Price Auction is truthful
Highest bidder gets the painting, pays the next highest bid
![Page 52: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/52.jpg)
The Pioneers of Game Theory
John Von Neumann
Founded Game Theory with Oskar Morgenstern (1928-44)
Pioneered the Concept of a Digital Computer and Algorithms
60 years later (2000), there is a convergence
John F. Nash
Introduced the concept of Nash equilibrium and its existence
Also famous for his work on cooperative games and Nash bargaining
Nobel prize in Economics: 1994
Biographical movie: A Beautiful Mind
![Page 53: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/53.jpg)
The Pioneers of Mechanism Design
Leonid Hurwicz Eric Maskin
Jointly awarded the Nobel prize in Economics, 2007
For laying the foundation of Mechanism Design Theory
Roger Myerson
![Page 54: How to Achieve Society's Goals: The Mechanism Design Solution · Lloyd S. Shapley Alvin E. Roth "for the theory of stable allocations and the practice of market design" DARPA Red](https://reader034.vdocuments.us/reader034/viewer/2022050218/5f6411ee91df9b66db65e03f/html5/thumbnails/54.jpg)
To Probe Further
● Y. Narahari, Dinesh Garg, Ramasuri Narayanam, and Hastagiri Prakash.
Game Theoretic Problems in Network Economics and Mechanism Design
Solutions. Springer-Verlag, London, 2009.
● Yoav Shoham, Kevin Leyton-Brown. Multiagent Systems Algorithmic,
Game-Theoretic, and Logical Foundations. Cambridge University Press,
2009. E-book freely downloadable from www.masfoundations.org