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Optimal Dynamic Mechanism Design and the Virtual-Pivot Mechanism

Author

Listed:
  • Sham M. Kakade

    (Microsoft Research New England, Cambridge, Massachusetts 02142)

  • Ilan Lobel

    (Stern School of Business, New York University, New York, New York 10012)

  • Hamid Nazerzadeh

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

Abstract

We consider the problem of designing optimal mechanisms for settings where agents have dynamic private information. We present the virtual-pivot mechanism, which is optimal in a large class of environments that satisfy a separability condition. The mechanism satisfies a rather strong equilibrium notion (it is periodic ex post incentive compatible and individually rational). We provide both necessary and sufficient conditions for immediate incentive compatibility for mechanisms that satisfy periodic ex post incentive compatibility in future periods. The result also yields a strikingly simple mechanism for selling a sequence of items to a single buyer. We also show that the allocation rule of the virtual-pivot mechanism has a very simple structure (a virtual index) in multiarmed bandit settings. Finally, we show through examples that the relaxation technique we use does not produce optimal dynamic mechanisms in general nonseparable environments.

Suggested Citation

  • Sham M. Kakade & Ilan Lobel & Hamid Nazerzadeh, 2013. "Optimal Dynamic Mechanism Design and the Virtual-Pivot Mechanism," Operations Research, INFORMS, vol. 61(4), pages 837-854, August.
    • Handle: RePEc:inm:oropre:v:61:y:2013:i:4:p:837-854
    DOI: 10.1287/opre.2013.1194
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    References listed on IDEAS

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