Optimal shill bidding in the VCG mechanism

Itai Sher

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6 Scopus citations

Abstract

This paper studies shill bidding in the Vickrey-Clarke-Groves (VCG) mechanism applied to combinatorial auctions. Shill bidding is a strategy whereby a single decision-maker enters the auction under the guise of multiple identities (Yokoo et al. Games Econ Behav, 46 pp. 174-188, 2004). I formulate the problem of optimal shill bidding for a bidder who knows the aggregate bid of her opponents. A key to the analysis is a subproblem-the cost minimization problem (CMP)-which searches for the cheapest way to win a given package using shills. An analysis of the CMP leads to several fundamental results about shill bidding: (i) I provide an exact characterization of the aggregate bids b such that some bidder would have an incentive to shill bid against b in terms of a new property Submodularity at the Top; (ii) the problem of optimally sponsoring shills is equivalent to the winner determination problem (for single minded bidders)-the problem of finding an efficient allocation in a combinatorial auction; (iii) shill bidding can occur in equilibrium; and (iv) the problem of shill bidding has an inverse, namely the collusive problem that a coalition of bidders may have an incentive to merge (even after competition among coalition members has been suppressed). I show that only when valuations are additive can the incentives to shill and merge simultaneously disappear.

Original languageEnglish (US)
Pages (from-to)341-387
Number of pages47
JournalEconomic Theory
Volume50
Issue number2
DOIs
StatePublished - Jun 2012

Keywords

  • Collusion
  • Combinatorial auctions
  • Shill bidding
  • VCG mechanism
  • Winner determination problem

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