Optimal Auctions for Negatively Correlated Items

TL;DR

This paper derives the closed-form revenue-optimal auction for selling two negatively correlated items, addressing complex multidimensional feasibility and virtual value monotonicity issues, and characterizes the auction structure in single and multiple bidder scenarios.

Contribution

It introduces a generalized Border's theorem, adapts Myerson's ironing for negative correlation, and explicitly characterizes the optimal auction structure in this complex setting.

Findings

Optimal auction involves randomized and deterministic bundle menus.

Optimal auction cannot be achieved by any dominant-strategy IC and IR auction.

The solution guarantees Bayesian IC and IR, but not dominant-strategy IR.

Abstract

We consider the problem of designing revenue-optimal auctions for selling two items and bidders' valuations are independent among bidders but negatively correlated among items. In this paper, we obtain the closed-form optimal auction for this setting, by directly addressing the two difficulties above. In particular, the first difficulty is that when pointwise maximizing virtual surplus under multi-dimensional feasibility (i.e., the Border feasibility), (1) neither the optimal interim allocation is trivially monotone in the virtual value, (2) nor the virtual value is monotone in the bidder's type. As a result, the optimal interim allocations resulting from virtual surplus maximization no longer guarantees BIC. To address (1), we prove a generalization of Border's theorem and show that optimal interim allocation is indeed monotone in the virtual value. To address (2), we adapt Myerson's ironing procedure to this setting by redefining the (ironed) virtual value as a function of the lowest utility point. The second difficulty, perhaps a more challenging one, is that the lowest utility type in general is no longer at the endpoints of the type interval. To address this difficulty, we show by construction that there exist an allocation rule and an induced lowest utility type such that they form a solution of the virtual surplus maximization and in the meanwhile guarantees IIR. In the single bidder case, the optimal auction consists of a randomized bundle menu and a deterministic bundle menu; while in the multiple bidder case, the optimal auction is a randomization between two extreme mechanisms. The optimal solutions of our setting can be implemented by a Bayesian IC and IR auction, however, perhaps surprisingly, the revenue of this auction cannot be achieved by any (dominant-strategy) IC and IR auction.