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

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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.

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  1. Department of Economics, University of Texas, Austin, TX, 78712, USA

    Dale O. Stahl

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  1. Dale O. Stahl
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Stahl, D.O. The Inefficiency of First and Second Price Auctions in Dynamic Stochastic Environments. NETNOMICS: Economic Research and Electronic Networking 4, 1–18 (2002). https://doi.org/10.1023/A:1014959727397

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  • DOI: https://doi.org/10.1023/A:1014959727397

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