1. Intelligent Architectures for Electronic Commerce
Part 2.3: Auctions, Reverse Auctions and Voting

2. Auctions and Reverse Auctions
An auction is:
a mechanism for establishing a contract for the sale of goods/services by
a single seller (possibly through an auctioneer) to
one of a number of potential buyers.
A reverse auction is:
one of a number of potential sellers to
a single buyer.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

3. Auction Types How do people value items offered for auction?
In a private value auction the value of the item depends only on the agent’s individual preferences; e.g. the sale of bananas.
In a common value auction the value of the item depends entirely on how others value it; e.g. the sale of stocks and shares.
In a correlated value auction the value of the item depends both on the agent’s preferences and how others value it; e.g. the sale of art.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

4. Auction Mechanisms (1)
There are a number of common auction mechanisms:
English: first-price open-cry auction is used in most auction houses; e.g. for the sale of antiques or art.
The dominant strategy in an English auction is for a participant to bid the current price plus some delta until the agent reaches its reservation price.
First-price sealed-bid auction is where each participant has a single bid and all bids are submitted in sealed envelopes.
There is no dominant strategy for this type of auction.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

5. Auction Mechanisms (2)
Dutch: descending price. The seller periodically lowers price until a single buyer accepts that price. This was used in Dutch flower auctions and is designed to be efficient; i.e. to generate a contract for the sale of goods quickly and with minimal communication overheads.
This is equivalent to the first-price sealed-bid auction.
Vickrey: second-price sealed-bid. Each participant submits sealed bids for the item and the winner pays the value of the runner up.
If agents value items one the private value basis, then the dominant strategy is to bid their true valuation.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

6. Auction Mechanisms (3)
All of these auctions allocate the item Pareto efficiently to the bidder who wants it the most if the item is valued solely on individual preference.
The Vickrey and English auctions do not encourage counter-speculation (both have a dominant strategy).
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

7. Revenue Equivalence (1)
Suppose that you are setting up an Internet-based auction house.
You want to advertise your service as using an auction mechanism that maximises the revenue raised for your clients.
Which auction makes the seller the most money?
All four protocols produce the same expected revenue in private value auctions and with bidders that are risk-neutral.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

8. Revenue Equivalence (2)
If, however, the bidders are risk-averse then the Dutch and First-price auctions give higher expected revenues. This is because a risk-averse agent can insure himself by bidding more than would be required to secure the item.
Most auctions are not private value. In correlated value auctions the English auction with more than 3 bidders leads to higher revenue. This is because increasing price causes others to increase their valuation.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

9. Cheating
Bidder collusion affects all the four auctions; all bidders could collude to keep the price down.
A lying auctioneer can make some extra money on a Vickrey auction by over-stating the second price. This is one of the reasons it is not often used by humans (the other reason being that humans are reluctant to reveal their true valuations). A lying auctioneer can also place phantom bids in an English auction to bid up the price.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

10. The Winner’s Curse
The winner’s curse happens in all common value auctions (no individual preferences influence the value of the item).
The fact that you win means that you paid more than anyone else was willing to pay; i.e. too much!
In this case, the bidder should lie instead.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

11. The Trading Agent Competition
The Trading Agent Competition (TAC) tests agents in a competitive market.
Each TAC agent is a simulated travel agent with 8 clients, each of which wants a trip to Boston with randomly generated preferences for departure times, hotels and entertainment.
The winner is the agent that maximises the sum of their customers’ utilities minus the price paid for the packages. (Utility is zero if a customer doesn’t travel.)
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

12. Hotel Auctions
Hotels are allocated using multi-unit English auctions with random closing due to inactivity.
Most bids were received at the last minute.
The utility of a hotel reservation is determined by the utility of the whole package.
In the preliminary stage agents that bid on the basis of this utility won without paying too much, but in the final all agents chose this strategy and ended up paying too much.
The final winners incorporated risk assessment.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

13. Flight Auctions
An infinite number of flights were available and they had a maximum price of $600, but price fluctuated randomly over time.
The obvious strategy is to wait until the end since by then the agent will have hotel information.
There is, however, some risk with this strategy because the auction could take too long. More risk averse agents bid early and bid the maximum.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

14. Entertainment Auctions
Tickets could be either bought or sold.
Some agents tried to bid on them by considering them part of the whole package and others just bid individually.
Some tried to make a profit by buying up cheap tickets and trying to sell them on.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

15. TAC Strategies (1)
One strategy is to calculate the optimal allocation of the owned goods and any required goods (assuming current prices) and then bid on the missing items.
The drawback with this is that the agent doesn’t know if it will get the goods at the asking price (except for flights).
More intelligent bidding strategies were then adopted to try to minimise the risk of either getting nothing or paying too much.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

16. TAC Strategies (2)
The other strategy commonly adopted was to treat each customer individually and find the best itinerary for each. This was not as successful.
For both these strategies, many heuristics must be used to determine what to bid on and when.
The question is: would you want to risk real money into automated markets?
At present decisions are made by human users of electronic markets, not agents.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

17. The Contract Net (1)
The Contract Net Protocol is the most commonly considered example of a one-shot reverse auction.
The protocol is as follows:
An agent recognises that it has a problem.
It announces that it needs the problem solved.
Agents may bid for the contract to solve the problem.
The contract is awarded.
The successful agent solves the problem.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

18. The Contract Net (2) I have a problem… 1. Recognising the problem.
2.Task Announcement A3 A4
3. Bidding.
4. Awarding the
contract.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

19. Recognising the Problem
In this stage, an agent recognises that it has a problem it wants help with.
The agent has a goal to achieve, and either:
it realises that it cannot achieve the goal in isolation (it may not have the capability), or
it realises it would prefer not to achieve the goal in isolation (the quality of the solution that another agent can supply is higher, or a solution can be found more quickly through delegation).
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

20. Announcement
In this stage, the agent with the problem to be solved (the manager) sends out an announcement of the problem which includes a specification of the task to be performed.
The specification must include:
a description of the task itself,
constraints (e.g. deadlines, quality constraints), and
meta-task information (e.g. deadline for receipt of bids).
The announcement is then broadcast.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

21. Bidding
Agents that receive the announcement decide for themselves whether they wish to bid for the task.
The factors involved in this choice are:
the agent must decide whether it is capable of expediting the task; and
it must determine quality constraints and pricing information (if relevant).
If they do choose to bid, then they submit a tender.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

22. Awarding and Expediting
The manager agent must choose between bids and decide who to “award the contract” to.
The result of this process is communicated to the agents that submitted bids.
The successful contractor then expedites the task.
This may involve generating further manager-contractor relationships: sub-contracting.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

23. Implementation Issues
There are a number of issues that must be addressed when implementing the Contract Net:
How to specify tasks?
How to specify the quality of service?
How to select between competing offers?
How to differentiate between offers based in multiple criteria?
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

24. Limitations of the Contract Net
The contract net protocol is one-shot.
What if the manager agent cannot (or does not wish to) distinguish between offers and wishes to go to another round. (This is similar to the way that 3G mobile licenses were sold.)
There is a single contract considered.
What if it is essential to consider more than one contract at a time.
What if no agent can fulfill the contract, but more than one agent in combination can deliver.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

25. The Iterated Contract Net
The Iterated Contract Net Protocol is an attempt to extend the Contract Net to multiple rounds.
Rather than simply accepting a single initial bid, the manager may select a subset of the agents and request further bids.
Eventually the manager will make the choice of a single contractor.
Note that a model of this protocol is given within the FIPA communication protocols.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

26. Coalition Formation (1)
Suppose that the contract is for the delivery of quantity q of item i.
What if no single agent can fulfill this contract?
Modify the contract net protocol so that the manager can select a subset of agents, each of which may supply a part of the contract.
Furthermore, if the manager splits the supply, it may be able to get a better price for the whole contract.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

27. Coalition Formation (2)
Suppose that the agent requires quantity q of the item and receives bids from all agents in the set A.
While q > 0 and A  {} do:
Select the agent, ai  A, offering the lowest cost per unit of the item. Agent ai offers quantity qi of the item.
If q  qi then accept quantity q from ai and reject all others in A.
If q  qi then accept quantity qi from ai.
Set q = q - qi and A = A - ai.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

28. Coalition Formation (3)
What if more than one item is required?
The algorithm must then be modified to select the subset of the bidding agents so that the required quantity of each item is obtained.
What if the items are not independent?
For example, the bidding agent may specify that if item 1 is accepted then item 2 must also be accepted.
As assumptions are relaxed, the problem becomes harder.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

29. Voting (1)
Fifteen academics are trying to decide whether to buy Beer, Wine or Milk for a party.
How do they decide what to buy?
Plurality vote: everyone votes for their most preferred.
Beer gets 6 votes.
Wine gets 2 votes.
Milk gets 7 votes.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

30. Voting (2)
Runoff: The two with most votes the first time around are then voted for again. (E.g. Political party leadership elections.)
First round: Beer=6, Wine=2, Milk=7.
Second round: Beer=8, Milk=7.
Pair-wise comparison: Compare all pairs and pick the one that wins the most comparisons.
Beer wins 15 pair-wise comparisons.
Wine wins 16 pair-wise comparisons.
Milk wins 14 pair-wise comparisons.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

31. Symmetry Establish fairness via symmetry:
Reflectional symmetry: If one agent prefers A to B and another prefers B to A then their votes cancel.
Rotational symmetry: If one agent prefers A,B,C and another prefers B,C,A and another C,A,B then their votes cancel.
Plurality and runoff voting violate reflectional symmetry.
Pair-wise comparison violates rotational symmetry.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

32. Borda Count
In 1770 the members of a academy of Science in Paris were pondering what would be a fair way to elect their new leader.
Borda proposed the following mechanism:
With x candidates, each voter awards x points to his first choice, x-1 points to his second, and so on.
The candidate with the most points wins.
Borda satisfies both reflectional and rotational symmetry.
In the example, Wine wins!
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

33. Voting Schemes (1)
Suppose that there is a set A of agents and a set O of outcomes.
Each agent i has a preference function >i over the set of outcomes.
Let us say that >* is the global preference function; i.e. what we want to find.
What are the ideal characteristics of >*?
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

34. Voting Schemes (2) >* exists for all possible set of inputs >i.
>* exists for every pair of outcomes.
>* is asymmetric and transitive over a set of outcomes.
>* should be Pareto efficient. That is, if all agents prefer Beer over Milk the >* should also prefer Beer over Milk.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

35. Voting Schemes (3)
The scheme used to arrive at >* should be independent of irrelevant alternatives. In other words, if in one world all agents prefer Beer to Milk and in another world agents prefer Beer to Milk then in both cases the rankings of Beer and Milk should be the same, regardless of how the agents feel about wine.
No agent should be a dictator in the sense that >* is always the same as >i no matter what the other >j are.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

36. Arrow’s Impossibility Theorem
Arrow’s Impossibility Theorem states that no social choice rule (no voting scheme) satisfies all of these six conditions.
For example, Borda violates 5.
Consider the preference
functions numbered 1-7.
Borda: c=20, b=19, a=18, d=13.
Without d, Borda is:
a=15, b=14 and c=13.
. a > b > c > d
. b > c > d > a
. c > d > a > b
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos

37. Strategic Voters Voters need not vote their true preference.
The ideal is to design a voting mechanism so that, if agents chose what is best for them, then a desirable social outcome follows.
However, the Giddard-Satterthwaitte Impossibility Theorem states that if the agents’ preference functions are unlimited then the only voting mechanism that is robust to strategic voters is a dictatorship.
Intelligent Architectures for Electronic Commerce
Timothy J Norman and Wamberto Vasconcelos