Learn While You Earn: Two Approaches to Learning Auction Parameters in Take-it-or-leave-it Auctions

Abstract

Much of the research in auction theory assumes that the auctioneer knows the distribution of participants ’ valuations with complete certainty. However, this is unrealistic. Thus, we analyse cases in which the auctioneer is uncertain about the valuation distributions; specifically, we consider a repeated auction setting in which the auctioneer can learn these distributions. Using take-it-or-leave-it auctions (Sandholm and Gilpin, 2006) as an exemplar auction format, we consider two auction design criteria. Firstly, an auctioneer could maximise expected revenue each time the auction is held. Secondly, an auctioneer could maximise the information gained in earlier auctions (as measured by the Kullback-Liebler divergence between its posterior and prior) to develop good estimates of the unknowns, which are later exploited to improve the revenue earned in the long-run. Simulation results comparing the two criteria indicate that setting offers to maximise revenue does not significantly detract from learning performance, but optimising offers for information gain substantially reduces expected revenue while not producing significantly better parameter estimates