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Addressing the Exposure Problem of Bidding Agents Using Flexibly Priced Options

Addressing the Exposure Problem of Bidding Agents Using Flexibly Priced Options
Addressing the Exposure Problem of Bidding Agents Using Flexibly Priced Options
In this paper we present a novel option pricing mechanism for reducing the exposure problem encountered by bidding agents with complementary valuations when participating in sequential, second-price auction markets. Existing option pricing models have two main drawbacks: they either apply fixed exercise prices, which may deter bidders with low valuations, thereby decreasing allocative efficiency, or options are offered for free, in which case bidders are less likely to exercise them, thereby reducing seller revenues. Our novel mechanism with flexibly priced options addresses these problems by calculating the exercise price as well as the option price based on the bids received during an auction. For this novel model, which extends and encompasses all the previous models examined, we derive the optimal strategies for a bidding agent with complementary preferences. Finally, we use these strategies to empirically evaluate the proposed option mechanism and compare it to existing ones, both in terms of the seller revenue and the social welfare. We show that our new mechanism achieves higher market efficiency compared to having no options and free options, while achieving higher revenues for the seller than any existing option mechanism.
581-586
Robu, Valentin
36b30550-208e-48d4-8f0e-8ff6976cf566
Vetsikas, Ioannis
e6dcc070-9f05-445e-a4f9-1672021c6ef6
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Jennings, Nick
ab3d94cc-247c-4545-9d1e-65873d6cdb30
Robu, Valentin
36b30550-208e-48d4-8f0e-8ff6976cf566
Vetsikas, Ioannis
e6dcc070-9f05-445e-a4f9-1672021c6ef6
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Jennings, Nick
ab3d94cc-247c-4545-9d1e-65873d6cdb30

Robu, Valentin, Vetsikas, Ioannis, Gerding, Enrico and Jennings, Nick (2010) Addressing the Exposure Problem of Bidding Agents Using Flexibly Priced Options. 19th European Conference on Artificial Intelligence (ECAI), Portugal. pp. 581-586 .

Record type: Conference or Workshop Item (Other)

Abstract

In this paper we present a novel option pricing mechanism for reducing the exposure problem encountered by bidding agents with complementary valuations when participating in sequential, second-price auction markets. Existing option pricing models have two main drawbacks: they either apply fixed exercise prices, which may deter bidders with low valuations, thereby decreasing allocative efficiency, or options are offered for free, in which case bidders are less likely to exercise them, thereby reducing seller revenues. Our novel mechanism with flexibly priced options addresses these problems by calculating the exercise price as well as the option price based on the bids received during an auction. For this novel model, which extends and encompasses all the previous models examined, we derive the optimal strategies for a bidding agent with complementary preferences. Finally, we use these strategies to empirically evaluate the proposed option mechanism and compare it to existing ones, both in terms of the seller revenue and the social welfare. We show that our new mechanism achieves higher market efficiency compared to having no options and free options, while achieving higher revenues for the seller than any existing option mechanism.

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Published date: August 2010
Venue - Dates: 19th European Conference on Artificial Intelligence (ECAI), Portugal, 2010-08-01
Organisations: Agents, Interactions & Complexity

Identifiers

Local EPrints ID: 270992
URI: http://eprints.soton.ac.uk/id/eprint/270992
PURE UUID: ad8015d2-c80b-4c1a-ae0c-df36a3772c45
ORCID for Enrico Gerding: ORCID iD orcid.org/0000-0001-7200-552X

Catalogue record

Date deposited: 05 May 2010 13:55
Last modified: 10 Dec 2019 01:44

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Contributors

Author: Valentin Robu
Author: Ioannis Vetsikas
Author: Enrico Gerding ORCID iD
Author: Nick Jennings

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