An options-based solution to the sequential auction problem

The sequential auction problem is commonplace in open, electronic marketplaces such as eBay. This problem occurs when a buyer faces a complex strategic problem in bidding across multiple auctions, each selling similar or essentially identical items and when the buyer would have a simple, truth-revealing strategy if there was but a single auction event. Our model allows for multiple, distinct goods and market dynamics with buyers and sellers that arrive over time. Sellers each bring a single unit of a good to the market while buyers can have values on bundles of goods. We model each individual auction as a second-price (Vickrey) auction and propose an options-based, proxied solution to provide price and winner-determination coordination across auctions. While still allowing for temporally uncoordinated market participation, this options-based approach solves the sequential auction problem and provides a market in which truthful bidding is a weakly dominant strategy for buyers. An empirical study suggests that this coordination can enable a significant efficiency and revenue improvement over the current eBay market design, and highlights the various effects on performance of complex buyer valuations (buyers with substitutes and complements valuations) and in varying the market liquidity.