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2 - Learning, Experimentation, and Information Design
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- By Johannes Hörner, Yale University, Andrzej Skrzypacz, Stanford University
- Edited by Bo Honoré, Princeton University, New Jersey, Ariel Pakes, Harvard University, Massachusetts, Monika Piazzesi, Stanford University, California, Larry Samuelson, Yale University, Connecticut
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- Book:
- Advances in Economics and Econometrics
- Published online:
- 27 October 2017
- Print publication:
- 02 November 2017, pp 63-98
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Summary
INTRODUCTION
The purpose of this paper is to survey recent developments in a literature that combines ideas from experimentation, learning, and strategic interactions. Because this literature is multifaceted, let us start by circumscribing our overview. First and foremost, all surveyed papers involve nontrivial dynamics. Second, we will restrict attention to models that deal with uncertainty. Models of pure moral hazard, in particular, will not be covered. Third, we exclude papers that focus on monetary transfers. Our goal is to understand incentives via other channels – information in particular, but also delegation. Fourth, we focus on strategic and agency problems, and so leave out papers whose scope is decision-theoretic. However, rules are there to be broken, and we will briefly discuss some papers that deal with one-player problems, to the extent that they are closely related to the issues at hand. Finally, we restrict attention to papers that are relatively recent (specifically, we have chosen to start with Bolton and Harris, 1999).
Our survey is divided as follows. First, we start with models of strategic experimentation. These are abstract models with few direct economic applications, but they develop ideas and techniques that percolate through the literature. In these models, players are (usually) symmetric and externalities are (mostly) informational.
Moving beyond the exploitation/exploration trade-off, we then turn to agency models that introduce a third dimension: motivation. Experimentation must be incentivized. The first way this can be done (Section 3) is via the information that is being disclosed to the agent performing the experimentation, by a principal who knows more or sees more. A second way this can be done is via control. The nascent literature on delegation in dynamic environments is the subject of Section 4.
Section 5 turns to models in which information disclosure is not simply about inducing experimentation, but manipulating the agent's action in broader contexts. To abstract from experimentation altogether, we assume that the principal knows all there is to know, so that only the agent faces uncertainty.
Finally, Section 6 discusses experimentation with more than two arms (Callander, 2011).
EQUILIBRIUM INTERACTIONS
Strategic Bandits
Strategic bandit models are game-theoretic versions of standard bandit models. While the standard “multi-armed bandit” describes a hypothetical experiment in which a player faces several slot machines (“one-armed bandits”) with potentially different expected payouts, a strategic bandit involves several players facing (usually, identical) copies of the same slot machine.
15 - Properties of the Combinatorial Clock Auction
- from Part II - The Combinatorial Clock Auction Designs
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- By Jonathan Levin, Graduate School of Business, Stanford University, Andrzej Skrzypacz, Graduate School of Business, Stanford University
- Edited by Martin Bichler, Technische Universität München, Jacob K. Goeree, University of New South Wales, Sydney
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- Book:
- Handbook of Spectrum Auction Design
- Published online:
- 26 October 2017
- Print publication:
- 26 October 2017, pp 294-317
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Summary
In this paper we study some properties of a new auction design, the combinatorial clock auction (or CCA). The CCA was proposed by Ausubel, Cramton and Milgrom (2006). It is essentially a dynamic Vickrey auction. The Vickrey auction is central to economic theory as the unique auction that provides truthful incentives while achieving an efficient allocation. Yet it is often viewed as impractical for real-world applications because it requires bidders to submit bids for many possible packages of items. Economists think of dynamic auctions as having an advantage in this regard because bidders can discover gradually how their demands fit together — what Paul Milgrom has called the “package discovery” problem.
The CCA combines an initial clock phase, during which prices rise and bidders state their demands in response to the current prices, with a final round in which bidders submit sealed package bids. The seller uses the final bids to compute the highest value allocation and the corresponding Vickrey payments. Ideally, bidders demand their most desired package at every stated price in the clock phase, allowing for information revelation. Then in the final round, they bid their true preferences, leading to an efficient allocation with truthfulVickrey prices. The question we address is whether this is the likely equilibrium outcome of the CCA; that is, whether the desirable incentive properties of the Vickrey auction are retained.
The practical motivation for our study is the recent and widespread adoption of CCA bidding to sell radio spectrum licenses. Spectrum auctions have provided the motivation for some important recent innovations in auction design, starting with the simultaneous ascending auction pioneered by the FCC in the early 1990s and subsequently adopted in many other countries (Klemperer, 2004; Milgrom, 2004). The FCC design allows for gradual information revelation, but it does not easily accommodate package bidding, and it creates incentives for demand reduction because winners pay their bids (Cramton, 2013). In principle, the CCA addresses both of these issues.