Costly valuation computation in auctions

Abstract

We investigate deliberation and bidding strategies of agents with unlimited but costly computation who are participating in auctions. The agents do not apriori know their valuations for the items begin auctioned. Instead they devote computational resources to compute their valuations. We present a normative model of bounded rationality where deliberation actions of agents are incorporated into strategies and equilibria are analyzed for standard auction protocols. We show that even in settings such as English auctions where information about other agents' valuations is revealed for free by the bidding process, agents may still compute on opponents' valuation problems, incurring a cost, in order to determine how to bid. We compare the costly computation model of bounded rationality with a different model where computation is free but limited. For some auction mechanisms the equilibrium strategies are substantially different. It can be concluded that the model of bounded rationality impacts the agents' equilibrium strategies and must be considered when designing mechanisms for computationally limited agents.

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