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Artificial Intelligence and Auction Design

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  • Martino Banchio
  • Andrzej Skrzypacz

Abstract

Motivated by online advertising auctions, we study auction design in repeated auctions played by simple Artificial Intelligence algorithms (Q-learning). We find that first-price auctions with no additional feedback lead to tacit-collusive outcomes (bids lower than values), while second-price auctions do not. We show that the difference is driven by the incentive in first-price auctions to outbid opponents by just one bid increment. This facilitates re-coordination on low bids after a phase of experimentation. We also show that providing information about lowest bid to win, as introduced by Google at the time of switch to first-price auctions, increases competitiveness of auctions.

Suggested Citation

  • Martino Banchio & Andrzej Skrzypacz, 2022. "Artificial Intelligence and Auction Design," Papers 2202.05947, arXiv.org.
    • Handle: RePEc:arx:papers:2202.05947
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Inkoo Cho & Noah Williams, 2024. "Collusive Outcomes Without Collusion," Papers 2403.07177, arXiv.org.
    2. Rohit Lamba & Sergey Zhuk, 2022. "Pricing with algorithms," Papers 2205.04661, arXiv.org, revised Jun 2022.
    3. Qian Qi, 2023. "Artificial Intelligence and Dual Contract," Papers 2303.12350, arXiv.org, revised Jun 2024.
    4. Ivan Conjeaud, 2023. "Algorithmic collusion under competitive design," Papers 2312.02644, arXiv.org, revised Sep 2024.
    5. Olivier Compte, 2023. "Q-learning with biased policy rules," Papers 2304.12647, arXiv.org, revised Oct 2023.
    6. Martino Banchio & Giacomo Mantegazza, 2022. "Artificial Intelligence and Spontaneous Collusion," Papers 2202.05946, arXiv.org, revised Sep 2023.
    7. Peyman Khezr & Vijay Mohan & Lionel Page, 2024. "Strategic Bidding in Knapsack Auctions," Papers 2403.07928, arXiv.org, revised Apr 2024.
    8. Epivent, Andréa & Lambin, Xavier, 2024. "On algorithmic collusion and reward–punishment schemes," Economics Letters, Elsevier, vol. 237(C).
    9. Daniele Condorelli & Massimiliano Furlan, 2023. "Cheap Talking Algorithms," Papers 2310.07867, arXiv.org, revised Oct 2024.

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