Addressing the Exposure Problem of Bidding Agents Using Flexibly Priced Options

Abstract. In this paper we introduce a new option pricing mechanism for reducing the exposure problem encountered by bidding agents with complementary valuations when participating in sequential, second-price auction markets. Existing option pricing models have two main drawbacks: they either apply fixed exercise prices, which may deter bidders with low valuations, thereby decreasing allocative efficiency, or options are offered for free, in which case bidders are less likely to exercise them, thereby reducing seller revenues. The proposed mechanism involving flexibly priced options addresses these problems by calculating the exercise price as well as the option price based on the bids received during an auction. For this new model, which extends and encompasses all the previous models examined, we derive the optimal strategies for a bidding agent with complementary preferences. Finally, we use these strategies to evaluate the proposed option mechanism through Monte-Carlo simutions, an...

• Type: Conference
• Year: 2010
• Where: ECAI
• Authors: Valentin Robu, Ioannis A. Vetsikas, Enrico H. Gerding, Nicholas R. Jennings
• Keywords: Artificial Intelligence, ECAI 2010, Option Mechanism, Option Pricing, Option Pricing Mechanism