Optimal Auction Design for Wi-Fi Procurement

Abstract

The unprecedented growth of cellular traffic driven by the use of smartphones for web surfing, video streaming, and cloud-based services poses bandwidth challenges for cellular service providers. To manage the increasing data traffic, cellular service providers are experimenting with the use of third-party Wi-Fi hot spots to augment their cellular capacity. We develop an analytical framework to study the optimal procurement auction for Wi-Fi capacity. Such an auction design is complicated by the fact that Wi-Fi networks have much more limited spatial coverage compared with the cellular network. Neither a global auction that includes all Wi-Fi hot spots nor multiple local auctions that include only hot spots in each local Wi-Fi region is optimal. We find that the optimal mechanism is an integration of one global auction that includes hot spots from an endogeneously determined set of Wi-Fi regions and many separate local auctions that are only held in the rest of the Wi-Fi regions. To implement the optimal mechanism, we also provide an efficient algorithm whose computation complexity is of the order of the number of Wi-Fi regions. Our work contributes to the literature by designing the optimal mechanism for a unique type of IT procurement auction problem that is a tight integration of economics and computational technology. The online appendix is available at https://doi.org/10.1287/isre.2017.0742 .