Designing Auctions when Algorithms Learn to Bid
This work addresses revenue shortfalls for auction designers when bidders use algorithms, but it is incremental as it builds on prior research by extending analysis to more realistic algorithm classes.
The paper tackled the problem of algorithmic bid suppression in online auctions by developing a computational laboratory framework to rank factors affecting seller revenue across multiple algorithm classes, finding that structural market parameters like competitive pressure and budget tightness dominate algorithmic design choices, with auction format effects varying by context.
Algorithms increasingly automate bidding in online auctions, raising concerns about tacit bid suppression and revenue shortfalls. Prior work identifies individual mechanisms behind algorithmic bid suppression, but it remains unclear which factors matter most and how they interact, and policy conclusions rest on algorithms unlike those deployed in practice. This paper develops a computational laboratory framework, based on factorial experimental designs and large-scale Monte Carlo simulation, that addresses bid suppression across multiple algorithm classes within a common methodology. Each simulation is treated as a black-box input-output observation; the framework varies inputs and ranks factors by association with outcomes, without explaining algorithms' internal mechanisms. Across six sub-experiments spanning Q-learning, contextual bandits, and budget-constrained pacing, the framework ranks the relative importance of auction format, competitive pressure, learning parameters, and budget constraints on seller revenue. The central finding is that structural market parameters dominate algorithmic design choices. In unconstrained settings, competitive pressure is the strongest predictor of revenue; under budget constraints, budget tightness takes over. The auction-format effect is context-dependent, favouring second-price under learning algorithms but reversing to favour first-price under budget-constrained pacing. Because the optimal format depends on the prevailing bidding technology, no single auction format is universally superior when bidders are algorithms, and applying format recommendations from one algorithm class to another leads to counterproductive design interventions.