Design of Combinatorial Auctions

Abstract

Suppose you must auction off a dining room set consisting of four chairs and a table. Should you auction off the entire set or run five separate auctions for each piece? It depends, of course, on what bidders care about. If every bidder is interested in the dining room set and nothing less, the first option is preferable. If some bidders are interested in the set but others are interested only in a chair or two it is not obvious what to do. If you believe that you can raise more by selling off the chairs separately than the set, the second option is preferable. Notice, deciding requires a knowledge of just how much bidders value different parts of the ensemble. For this reason, economic efficiency is enhanced if bidders are allowed to bid directly on combinations or bundles of different assets instead of bidding only on individual items. Auctions where bidders are allowed to submit bids on combinations of items are usually called combinatorial auctions. ‘Combinational auctions’ is more accurate, but we will follow convention.