Optimal price decremental strategy for Dutch auctions

Abstract

Abstract — In a Dutch auction, the price of an item decreases incrementally from thestarting price at regular intervals. A bidder may buy the item at any time and stop theauction at the current price. This paper presents an optimal price decrement strategyin a Dutch auction, such that the expected revenue of the auction host is maximized.Properties of the optimal solution and a simple iterative solution methodology arediscussed. Numerical studies show that significant gain could be obtained comparedwith a simple reference strategy.Subject terms: Dutch auction; optimal auction; bidding; 3G; wireless application protocol;optimization; time discounting; online auction;Technical Subject Area: Mobile Internet: Applications and Technology, PersonalCommunications 1 Introduction With recent advances in wireless standards, such the IMT2000 for cellular networks as well as theHIPERLAN and the IEEE802.11 standards for wireless local area networks, there has been greatexpectation that wireless data applications will soon become popular just like wireless telephony.In anticipation of this development, there have been many attempts in testing pilot applications onvarious wireless platforms. The Information Engineering Department at the Chinese University ofHong Kong has established a site, jawap.net, based on the Wireless Application Protocol(WAP) toprovide a host of wireless applications. Among them is an implementation of an Dutch AuctionSystem.The Dutch auction is said to originate in the Netherlands and uses a descending-price format unlikethe so-called ”English Auction”. In the Dutch scheme, when an object is presented to interestedbuyers for bidding the price will start at a high value and progressively decreases downward until abuyer bids for the object by making a declaration. If multiple declarations are made, any commonresolution scheme can be invoked to break the tie. It is possible to extend this scheme for theauctioning of multiple units of an object. Successful bidders bidding at the same price will eachreceive their unit at the bid price. If the number of units is not sufficient to cover all the bids,a tie-breaking rule is invoked. If sufficient units of the object are still available, the auction willcontinue until all the units are sold or a reserved price level is reached.The Dutch auction is one of the four major auctioning schemes ([1] or the survey article [2],) thatalso include the English auction