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The Inefficiency of First and Second Price Auctions in Dynamic Stochastic Environments

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  • Dale O. Stahl

    (University of Texas)

Abstract

First and second price auctions are optimal mechanisms for resource allocation in many situations and are used widely. However, unlike the static once-and-for-all situations for which auctions are efficient, in dynamic stochastic environments these standard auctions cannot necessarily support optimal allocations. The potential inefficiency of auctions is demonstrated by example. A computer server is modeled as a non-interruptible M/M/1 system, with heterogeneous users. The optimal allocation of jobs is derived, and it is shown that this allocation cannot be supported as either a first-price or a second-price auction equilibrium.

Suggested Citation

  • Dale O. Stahl, 2002. "The Inefficiency of First and Second Price Auctions in Dynamic Stochastic Environments," Netnomics, Springer, vol. 4(1), pages 1-18, March.
    • Handle: RePEc:kap:netnom:v:4:y:2002:i:1:d:10.1023_a:1014959727397
    DOI: 10.1023/A:1014959727397
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    References listed on IDEAS

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    Cited by:

    1. Patrick Maillé & Bruno Tuffin, 2003. "The Progressive Second Price Mechanism in a Stochastic Environment," Netnomics, Springer, vol. 5(2), pages 119-147, November.
    2. Polanski Arnold & Cardona Daniel, 2012. "Multilevel Mediation in Symmetric Trees," Review of Network Economics, De Gruyter, vol. 11(3), pages 1-23, September.

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