Multiple-issue auction and market algorithms for the world wide web
Introduction
In order to put our study into perspective, we present a market framework adapted from the work of Guttman and Maes [20](Fig. 1). The market framework consists of one or many buyers and one or many sellers. One buyer and one seller, assuming the current tendency towards non-fixed prices, defines a traditional negotiation. The negotiation may take place face-to-face or electronically. One seller and many buyers defines an auction which may be live or on-line. Many sellers and one buyer defines a reverse auction, an example being a government auction. Many sellers and many buyers defines a market or a double auction, which may be live or electronic. Live and electronic versions of stock exchanges exist. Guttman and Maes [20]also differentiate between traditional classified ad markets and traditional stock markets, the difference being that in traditional stock markets, there is a centralized multilateral exchange compared to classified ad markets, where trading is ad hoc and bilateral. Centralized multilateral exchange markets may become classified ad markets and vice versa due to revolutionary changes made possible through the Internet and the expansion of the world wide web for electronic commerce. An example of a previously classified ad market, which is becoming an exchange market, is the US home mortgage market. Traditional retail markets may offer an opposite example. Such markets are becoming more one-to-one, exhibiting features similar to classified ad markets (e.g., Egghead and Dell Computer). Some traditional markets and auctions offer the possibility of trading both electronically or live. Even the traditional large stock exchanges are moving in the direction of partially electronic markets.
Most existing live and electronic auctions and markets mainly focus on a single issue, namely price of the merchandise or stock [20]. There exists extensive literature demonstrating the detrimental effects of single issue, distributive (zero-sum) negotiations. Price wars are a concrete example, leading to a volatile market 1, 8, 21, 25. Exclusive focus on price will also do a disservice to buyers and sellers alike by hiding important value attributes from consideration. Following Guttman and Maes [19], an explicit consideration of such multiple value attributes holds the promise of converting distributive negotiations into integrative negotiations. See also the work of Kersten and Szpakowicz [27].
In this paper, we develop simple, heuristic algorithms for multiple-issue electronic markets and auctions, to match businesses with businesses and consumers based on dovetailing buyers' and sellers' underlying interests and preferences. We argue that such dovetailed matches should help stabilize markets and make them more efficient. To the best of our knowledge, there is very little literature on multiple-issue markets and auctions whether electronic or live. See, for example, the works of Bodendorf et al. [7], Kagel and Roth [23](pp. 416–421) and Reinheimer and Bodendorf [47]. When discussing auctions, we focus on auctioning a single good having multiple negotiable attributes/issues or multiple quantities of homogeneous goods, such as stocks. When discussing markets, we focus on the case of multiple diametrically opposed issues, as well as the case where quantity is a negotiable issue. A web site that runs the algorithms acts as the exchange mechanism.
The organization of the rest of the paper is as follows. In Section 2, we review the relevant literature. In Section 3, we discuss some theory of multiple-issue markets and auctions; in Section 4, auction algorithms and in Section 5, market algorithms. Section 6concludes the paper.
Section snippets
Literature overview
We classify the literature into Electronic Negotiation Models, Automated Agents, Auctions and Markets. The literature is vast and draws upon Economics, Finance, Information Sciences, Marketing and Negotiation Science, among others. We focus on the recent electronic applications of auctions and markets and also provide some representative web site URLs. In many instances, the developments have been so rapid that the academic journals are lagging behind and many of the applications and
Quantity is not an issue
Fig. 5a presents contract curves for a two-issue market/auction example, where there exists one seller and three potential buyers. When dealing with multiple issues in auctions and markets, in a diametrically opposed issue space, some matches of buyers and sellers make more sense than others because of dovetailing underlying values. If we map the contract curves from Fig. 5a to the utility space, we obtain Fig. 5b. The result is the three Pareto frontiers from which no joint gains are possible
Quantity is not an issue
Fig. 7 illustrates the Leap Frog Method where bidders determine the path of bids. This is a natural extension of a typical single issue English auction where bidders shout out their bids. Each bid must be an improvement over the previous bid in at least one of the issues and no worse in any of the issues. We cannot advocate this method because the path is somewhat arbitrarily determined and it does not consider the preference of the auction maker at all.
In Fig. 8, we describe an Auction Maker
Quantity is an issue
OptiMark's two-issue market algorithm is novel and is gaining momentum among practitioners. OptiMark's training institute has taught over 2000 traders to use their forthcoming system. It does have several appealing features: anonymity, possible elimination of market impact, preference elicitation over two issues and the aggregation of small trades matched with larger quantities. However, we have some criticisms towards the algorithm, which we wish to discuss. We also provide some suggestions
Concluding discussion
We have presented and discussed several multiple-issue auction and market algorithms. Much literature exists that discusses auctions and markets. However, very few mention multiple-issue auctions and markets and few algorithms and procedures exist for such situations. To compare and contrast such algorithms in an experimental setting, a number of performance measures could be utilized. They mostly relate to the quantity or value of goods traded, and stability and efficiency of trades. Quantity
Acknowledgements
We wish to express our thanks to Professor Gregory Kersten, University of Carleton, for useful suggestions regarding literature on electronic markets and auctions. We also express our thanks to Dr. John T. Rickard, OptiMark Technologies, and Mr. Alexander Zaitsev, Moscow State University, for very useful comments.
Dr. Jeffrey Teich is an Associate Professor at the New Mexico State University. His research interests and publications are in the areas of negotiation modeling and decision support. In addition, he has served as Visiting Professor at the Helsinki School of Economics teaching in its international programs.
Dr. Hannele Wallenius is a Senior Lecturer at the Department of Industrial Management, the Helsinki University of Technology. Her research interests and publications are in the areas of public
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Dr. Jeffrey Teich is an Associate Professor at the New Mexico State University. His research interests and publications are in the areas of negotiation modeling and decision support. In addition, he has served as Visiting Professor at the Helsinki School of Economics teaching in its international programs.
Dr. Hannele Wallenius is a Senior Lecturer at the Department of Industrial Management, the Helsinki University of Technology. Her research interests and publications are in the areas of public sector operations research and negotiation modeling.
Dr. Jyrki Wallenius is Professor of Management and Director of the International Center at the Helsinki School of Economics. He is also the Director of the Interactive Telecommunications Program at the Helsinki School of Economics, an intensive training program in cutting edge telecommunications technologies, applications and multimedia. Dr. Wallenius academic interests and published research lie in the areas of decision making and negotiation modeling.
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