Explicit shading strategies for repeated truthful auctions

TL;DR

This paper investigates how buyers might strategically shade their bids in revenue-maximizing auctions like Myerson and VCG, revealing that such auctions incentivize bid shading and suggesting simpler auction formats for transparency.

Contribution

It demonstrates that buyers have incentives to shade bids in revenue-maximizing auctions and characterizes the equilibrium bidding strategies, advocating for simpler auction formats.

Findings

Buyers shade bids non-linearly in Myerson auctions.

Equilibrium payoff matches that of first-price auctions without reserves.

Simpler auctions improve transparency and are beneficial for all parties.

Abstract

With the increasing use of auctions in online advertising, there has been a large effort to study seller revenue maximization, following Myerson's seminal work, both theoretically and practically. We take the point of view of the buyer in classical auctions and ask the question of whether she has an incentive to shade her bid even in auctions that are reputed to be truthful, when aware of the revenue optimization mechanism. We show that in auctions such as the Myerson auction or a VCG with reserve price set as the monopoly price, the buyer who is aware of this information has indeed an incentive to shade. Intuitively, by selecting the revenue maximizing auction, the seller introduces a dependency on the buyers' distributions in the choice of the auction. We study in depth the case of the Myerson auction and show that a symmetric equilibrium exists in which buyers shade non-linearly what would be their first price bid. They then end up with an expected payoff that is equal to what they would get in a first price auction with no reserve price. We conclude that a return to simple first price auctions with no reserve price or at least non-dynamic anonymous ones is desirable from the point of view of both buyers, sellers and increasing transparency.