Designing an auction protocol under asymmetric information on nature's selection

Abstract

Internet auctions are becoming an especially popular part of Electronic Commerce and auction protocols have been studied very widely in the field of multi-agent systems and AI. However, correctly judging the quality of auctioned goods is often difficult for non-experts (amateurs), in particular, on the Internet auctions. In this paper, we formalize such a situation so that Nature selects the quality of the auctioned good. Experts can observe Nature's selection (i.e., the quality of the good) correctly, while amateurs including the auctioneer cannot. In other words, the information on Nature's selection is asymmetric between experts and amateurs. In this situation, it is difficult to attain an efficient allocation, since experts have a clear advantage over amateurs and they would not reveal their valuable information without some reward. Thus, in this paper, we develop a new auction protocol in which truth-telling is a dominant strategy for each expert. This can be done by putting these experts in a situation similar to Prisoner's Dilemma. If they cooperate and tell lies, they can exclude amateurs, but betraying is a dominant strategy. By making experts to elicit their information on the quality of the good, the protocol can achieve a socially desirable, i.e., Pareto efficient allocation if certain assumptions are satisfied.