Lect 8-auctions

LECTURE 8:
Cooperation in MAS (II):
Negotiation via auctions

Artificial Intelligence II – Multi-Agent Systems
Introduction to Multi-Agent Systems
URV, Winter-Spring 2010

Lecture overview

Negotiation protocols
Auctions
English/Dutch/FPSB/Vickrey
Multi-attribute
Combinatorial

Cooperation hierarchy [last lecture]
MAS

Independent Cooperative
Self-interested Benevolent

Discrete Emergent With Without
communication - communication -
Explicit Implicit

Reactive
systems
Deliberative Negotiators

Partial Global Contract Net
Auctions
Planning

Negotiation between multiple agents

Need of negotiation in MAS
Agents may have incompatible goals, and
resources to achieve these goals may be
limited; in such cases competition and
conflicts may arise
The effects of the agents’ antagonistic
behaviour needs to be limited
Agents must be able to reach compromises,
resolve conflicts, allocate goods and
resources by way of an agreement
Agents’ interactions are governed by a set of
rules: an interaction protocol

Negotiation protocol elements (I)
Public elements
A negotiation set which represents the space
of possible offers/proposals that the agents
can make
The protocol rules which govern the agents’
interactions

Negotiation protocol elements (II)
Private elements
The set of strategies that the agents can use
to participate in the negotiation process:
They are not dictated by the protocol itself
May take into account the other agents’
strategies
Learning mechanisms

Protocol rules (I)
Admission rules
When an agent can participate in a negotiation
(e.g. eligibility criteria)
Interaction rules
Sequence of admissible/valid actions (e.g.
moments in which bids are allowed)
Validity rules
What constitutes a legal offer/proposal (e.g. a
new bid must be higher than the last bid)
Outcome determination rules
When an agreement has been reached

Protocol rules (II)
Withdrawal rules
When an agent can withdraw from the
negotiation
Termination rules
When a negotiation ends unsuccesfully
Commitment rules
How the commitments that agents make
during the negotiation are managed

Negotiation factors
Number of attributes: one, many
[Multi-attribute auctions]
Number of agents:
One-to-one
One-to-many
Many-to-many
Number of units: one, many
[Multi-unit auction]
Interrelated goods: one good or a number of
goods that are substitutable or interdependent
[Combinatorial auctions]

Protocol evaluation criteria (I)
Social welfare – the sum of all agent’s
payoffs or utilities in a given solution
Pareto efficiency – a solution x is Pareto
optimal if there’s no other solution x’ such
that at least one agent is better off in x’ than
in x, and no agent is worst off in x’ than in x
Individual rationality – an agent should not
lose out by participating in a negotiation

Protocol evaluation criteria (II)
Stability – mechanism should be designed to
be non-manipulable: motivate each agent to
behave in the desired manner
Computational efficiency – mechanisms
should be designed so that when agents use
them, as little computation is needed as
possible
Distribution and communication efficiency –
distributed protocol vs. minimum
communication (time, money,…)

Architecture for negotiating agents

Knowledge base Communication
Proposal component component
history Proposal Message
Message
Negotiation history interpretation

Message
Environment model generation Message
Decision making
component Query
Self-model
Update

Opponent model

Proposal

Auctions
A class of negotiation protocols which provide us
with methods for allocating goods/resources based
upon competition among self-interested parties
Where are auctions used?
Telecommunication and TV licenses, mining rights,
emission permits, airport gates and takeoff/landing
slots
Google AdSense
Extremely popular as a means for conducting
consumer-to-consumer (C2C) negotiations online
(eBay, Yahoo)
Collectibles (paintings, books, antiques)
Agricultural products (flowers, fish, tobacco)

Advantages of auctions
Markets may not exist for what the seller wants to
sell (phone spectrum)
The seller does not know how much an item is
worth
Create competition; enhances the seller’s
bargaining power
Flexibility
Less time-consuming and expensive than
negotiating a price
Simplicity in determining market-based prices

Auction participants
The auctioneer:
A seller who wants to sell goods at the highest possible
price, or
Someone who wants to subcontract out contracts at the
lowest possible price, or
A buyer who wants to buy a good
The bidders:
Buyers who want to acquire goods at the lowest possible
price, or
Contractors who want to get a contract at the highest price,
or
Sellers who want to sell their goods

Properties of participants
Agents are:
Self-interested: they are seeking to maximise their
own payoffs
Rational: they always prefer a larger payoff than a
smaller one
Different attitudes towards risk:
Risk-neutral: agents who bid conservatively and
will never exceed their true valuations
Risk-prone: agents who are likely to raise their
bids so that they are more likely to win

Basic concepts (I)
Bids: offers by bidders to buy or sell the
auctioned item
Buy bid: the price a bidder is willing to pay to
own an item
Sell bid: the price a bidder is willing to accept
to sell an item
Reservation price: Maximum/minimum price
that a buyer/seller is willing to pay/accept for
an item – usually private information

Basic concepts (II)
Process a bid: the auctioneer checks the
validity of a bid according to the rules of the
auction protocol and updates its database
Clearance: matching between buyers and
sellers and setting of the transaction price
Clearing price: final transaction price that the
winning bidder pays and the auctioneer
receives

Typical auction process (I)
Buyers and sellers register with the auction
house
The auction event is set up
The auction is scheduled and advertised
(local press, Internet, etc.)
The actual bidding phase takes place
according to the rules of the auction
Information may be revealed to participants to
some extent during the bidding phase

Typical auction process (II)

The bids are evaluated and the auction
closes with a winner being determined if
any of the bids is successful
The transaction phase takes place: the
buyer pays for the goods and the seller
ships/delivers them

Classification of auctions (I)

(1) Bidding rules
Single good or combinatorial
Single attribute or multi-attribute
Open (outcry) or sealed-bid
Ascending or descending
Single unit or multi-unit

Classification of auctions (II)
(2) Information revelation policy

When to reveal information: on each bid, at
predetermined points in time, on inactivity, etc.
What information
Bid: the price a seller would have to offer in order to trade
Ask: the price a buyer would have to offer in order to trade
Auction closure: known, unknown, after a period of
inactivity
To whom: participants only, everyone

Classification of auctions (III)
(3) Clearing policy
When to clear: on each bid, on closure,
periodically, after a period of inactivity
Who gets what (allocation and winner
determination problem)
At what prices: first, second price or other

Basic auction formats
Single sided
English
Dutch
FPSB-First price sealed bid
Vickrey
Multi-attribute
Combinatorial
Others …

English auction (I)
Open-outcry and ascending-price auction
The auctioneer announces an opening or
the reserve price
Bidders raise their bids and the auction
proceeds to successively higher bids
The winner of the auction is the bidder of
the highest bid

English auction (II)

The best strategy is to bid a small amount
above the previous high bid until one
reaches its private value and then stop
The bidders gain information by observing
the others’ bids
Bid increase, doubts, time taken to bid, …

English auction disadvantages (I)
The reserve price may not be met and the
item may remain unsold
The auctioneer may cheat by overstating a
reserve price or present a reserve price that
does not exist
Susceptible to rings (collusions)
In real life it can become complicated
(voices, signals)

English auction disadvantages (II)
Bidders can become carried away and
overbid
The seller may not receive the maximum
value for an item
Vulnerable to shills
Person associated to the seller that pretends to
be an enthusiastic customer
Phantom bid
The auctioneer calls a bid that no one has made

Dutch auction (I)
Open and descending-price auction
The auctioneer announces a very high
opening bid
Then the auctioneer keeps lowering the
price until a bidder accepts it – the winner
pays the price of its bid

Dutch auction (II)
Bidders need to decide in advance the
maximum amount that they are willing to bid
A bidder must decide when to stop the
auction (bid) based upon its own valuation of
the commodity and its prior beliefs about the
valuations of the other bidders
No relevant information on the valuation of
the other bidders is disclosed during the
process of the auction until it is too late

Comments on Dutch auctions

Very efficient in real time: used in The
Netherlands for selling fresh flowers,
Ontario tobacco auction, fresh produce
auctions, fish markets
The effect of competition on the buyers is
stronger in the Dutch auction than in the
English one

First-price sealed-bid auction (I)
Each bidder submits its own bid (usually in
writing) without knowledge of the bids of
others
Two phases:
(i) the bidding phase in which participants
submit their bids
(ii) the resolution phase in which the bids are
opened and the winner is determined
The highest bidder wins and pays the amount
of its bid

First-price sealed-bid auction (II)
An agent’s strategy depends on its own
valuation and prior beliefs about the other
bidders’ valuations
A higher bid raises the probability of
winning, but lowers the bidder’s profit if it
wins
Bidders are better off not bidding their true
valuations but a small amount below it
Trade-off between the profit they can get and
the probability of losing the auction

Multi-unit auctions

In many kinds of auctions there is a certain
quantity of units of the same item, which may
be distributed between different buyers
In a multi-unit auction sealed bids are sorted
from high to low, and the items awarded at
highest bid price until the supply is exhausted

Multi-unit auction example – 1000 units

200 units at 35 euros
300 units at 28 euros Awarded units
(mean price:
100 units at 27 euros 29,5 euros/unit)

…

Vickrey auction
A second-price sealed-bid auction,
also known as uniform second-
price sealed-bid or the philatelist
auction William
Vickrey,
Two distinct phases: the bidding Economics
phase and the resolution phase Nobel Prize
1996
The highest bid wins but the bidder
pays the amount of the second-
highest bid

Why do Vickrey auctions work?
Although it seems that the auctioneer would
make more money out of a first-price sealed
auction, this is not the case
Bidders adjust their bids upwards since they
are not deterred by fear that they will have to
pay too much
The price that the winning bidder pays
depends on the others’ bids alone and not on
any action that the bidder undertakes

Comments on Vickrey auctions

The best strategy is for the agent to
bid its true valuation
The bidders do not waste time in
counter-speculating what the other
bidders will do

Best strategy (I)

A bidder has a dominant strategy to bid an
amount equal to their valuation, that is: bi = vi
Consider bidding v - x if your true value is v
Suppose the highest bid other than yours is w
Case 1: If v - x > w you win the auction and pay w, just
as if you had bid v

Best strategy (II)
Case 2: If w > v you lose the auction and get
nothing, just as if you had bid v
Case 3: If v> w > v - x bidding v - x causes you to
lose the auction, whereas if you had bid v, you
would have won the auction and paid w for a net
surplus of v - w
Hence you can only lose, and never gain, by
bidding v - x

English vs Dutch auctions
Under some conditions, Dutch is equivalent
to FPSB, and Vickrey is equivalent to English
Dilemma: English (Vickrey) or sealed-bid
(Dutch) auction?
Ascending auction allows for collusion and
entry deterrence, but is likely to achieve an
efficient outcome
Sealed-bid auction may prevent collusion,
allows entry of weaker bidders, but leaves
probability of inefficient outcome

Solution: “Anglo-Dutch” auction
Auctioneer runs an English auction in which
the price is raised continuously until all but
two (or n) bidders have dropped out
The remaining bidders are then required to
make a final sealed-bid offer that is no lower
than the current asking price, and the winner
pays the bid

Advantages of Anglo-Dutch auction

The first stage of the auction (English) means
less loss of efficiency than might result from
pure sealed-bid auction
Sealed-bid at the final stage induces some
uncertainty about which of the finalists will
win, and entrants are attracted by the chance
to make it to the final

Multi-attribute auctions

Multi-attribute or multi-dimensional auctions
allow bidders to submit bids on more than
one attribute or dimension of a good
Very common in procurement situations
The attributes under negotiation are usually
defined in advance and bidders can compete
in open-cry or sealed-bid auctions

Example: a procurement auction (I)

Consider a manufacturer which uses raw
materials from a number of suppliers to
produce finished goods
Assume the manufacturer requires 1000
units of A by 31/03/2010
The manufacturer sends a Request For
Quotes (RFQ) to all potential suppliers of A

Example: a procurement auction (II)
Suppliers reply with a bid bi
<quantity, delivery_date, price>
The delivery_date and the quantity may deviate
from those requested by the manufacturer
The price offered by the various suppliers will
differ too
The manufacturer’s request could be covered by
one or more bids in combination (sole or multiple
sourcing)

Winner determination
Preference elicitation through an appropriate
scoring function
A multi-attribute offer has the form
vi=(vi1,…,vij) where vij is the level of attribute j
offered by i
Each bid is evaluated through a scoring
function S(vi) which is a weighted average
function – often scaled from 0 to 1

Example: 1000 units needed by 31/03/2010
S1: 500 units, 28/03, 30 euros/unit
If completeness is preferred => S3+S4 or S2
S2 (1000 units, 38000 euros, by April 4th)
S3+S4 (1000 units, 38500 euros, by April 2nd)
If sole-sourcing is preferred => S2
If deadline has to be kept => S1+S4
S1+S4 (800 units, 27600 euros, by March 30th)

Scoring functions and weights
Attributes may be interdependent: an
additive scoring function does not suffice =>
could use multi-linear expression
Example with two attributes x,y

The scoring function, if revealed, serves as
a guideline to the bidder
The winning bid is the one with the highest
score

Advantages of multi-attribute auctions

They allow more degrees of freedom for
bidders: price may not be the only attribute
of interest
More efficient information exchange
among the market participants

Combinatorial auctions
Auctioning multiple distinguishable items when
bidders have preferences over combinations of
items: complementarity & substitutability
Applications: allocation of transportation tasks,
bandwidth, manufacturing procurement, electricity
markets

Example: auctioning a three-seater sofa, a two-seater
one, two armchairs and a coffee table
What’s the best way to sell these goods? As a complete
set? Each item separately? Allow combinations?

Sequential vs parallel auctions
Sequential auctions: run individual auctions one
after the other
Impossible to determine best strategy because game tree
is huge
Inefficiencies can result from future uncertainties

Parallel auctions: run individual auctions in parallel
Inefficiencies can still result from future uncertainties
Difficult to keep track of several simultaneous auctions
with substitutable and interdependent goods (at least for
human agents)

Bundles of items
Combinatorial auctions: bids can be
submitted on combinations (bundles) of items
Example
Bundle1: the two-seater sofa and the table
Bundle2: the armchairs and the table
Bundle3: the two-seater sofa and the armchairs

275 $

350 $

400 $

300 $

325 $

Interest of combinatorial auctions
Bidder’s perspective
Avoids the need for lookahead
Auctioneer’s perspective
Optimal bundling of items
Winner determination problem: Decide on the
winning bids so as to maximize the sum of bid
prices (i.e. revenue)

Issues on combinatorial auctions
Should the combinations of items on which bids are
allowed be restricted?
Limits number of possibilities to be considered
Single-shot or iterative combinatorial auctions?
In an iterative auction, what information should be made
available to bidders from round to round?
What is the objective of the auctioneer?
Sell all items
Maximise revenue
Minimise number of buyers

Advantages of auctions

Flexibility, as protocols can be tailor-
made
Less time-consuming and expensive
than negotiating a price
Simplicity in determining the market
prices

Disadvantages of auctions

Winner’s curse
Lying auctioneer
Snipping
Others: rings, revelation of private
information, …

Winner’s curse

What bidders suffer when they win an auction by
overestimating how much something is worth and
therefore bidding too much – the most optimistic
bidder wins
More severe in common value auctions as one’s
valuation depends on the others’
A win may actually mean a loss …

Example of winner’s curse
Suppose several petroleum firms are bidding on the
drilling rights to a piece of tundra. No firm is sure how
much oil is underneath the property, so they hire a team
of engineers to poke at the surface rocks and make a
guess. The guesses will likely range from too low to too
high. Some firm's engineer will probably guess right, but
that firm won't win the auction. The winner will be the firm
whose engineer was the most overoptimistic. The
winning firm won't ultimately get as much oil as their
engineers promised, meaning the firm paid too much. In
short, the auction "winner" is ultimately a loser.

Facing the winner’s curse
Anticipate the effects of the winner’s curse
before bidding:
Assume that you have the highest estimate
Rational bidding: correct downwards
Any piece of information is useful to the
bidder – beware of rings !!!
How aggressively others bid
How many remain in the bidding
When others apparently drop off the bidding

Lying auctioneer (I)

In the Vickrey auction, the auctioneer
may overstate the second-highest bid
Solution: using cryptographic
electronic signatures
Cannot happen in the other 3
protocols

Lying auctioneer (II)

In English auctions: shills
[Read NYTimes article]
In sealed-bid auctions: Auctioneer may
place a bid himself (reservation price)
In Vickrey auctions: the auctioneer may bid
more than its true reservation price

Snipping
Snipping: bidding very late in the auction in the hope
that other bidders do not have time to respond and
you can snatch a bargain. This is an issue, in
particular in online auctions
Bidders may bid late in order to avoid:
increasing the price of the item early on in the
auction
revealing their preferences early in the auction
(especially experts)
bidding wars with other like-minded agents

Online auction systems
Online auctions are increasingly popular:
last minute package holidays, C2C
negotiations (eBay), B2B negotiations
Popularity and success of online auctions
can be attributed to:
Simple mechanisms used
Allow millions of people with no specialist
knowledge of negotiation protocols and
strategies to exchange goods

Pitfalls in auction design
Collusive behaviour
Entry deterrence
Setting reservation prices at the right level
Communication and computational efficiency
Advanced auction formats may be cognitively
complex and difficult to understand by
participants

Readings for this week
Chapter 8 in M.Fasli’s
book (Agent technology
for e-commerce)
New York Times article
(June 2000): In online
auctions, rings of
bidders
Chapter 14 in
M.Wooldridge’s book
(An Introduction to
MultiAgent Systems),
2nd edition

Lect 8-auctions

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