By Dirk G. Neumann
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Additional resources for Market Engineering
The choice rule assigns the item to the agent who placed the highest bid. The price the winning agent has to pay is his actual bid, while all the other agents do not have pay anything. Furthermore, suppose the environment is described by 42 Every market is a microeconomic system, whereas the reverse is not true. 43 In this case, the only real choice the agents have is to select their bid (Milgrom 1989). 44 This so-called shading behavior accounts for the fact that the winner has to pay his bid.
At the bottom line, traditional economic theory expresses the characteristics of the resource in terms of the Debreuian preference ordering over discrete or continuous resources. Clearly, this approach cannot explain, why exactly two goods are substitutes and two others are not. For example, butter and margarine are by intuition substitutes whereas wood and butter are not. In microeconomic theory this is explained by the cross price elasticity (Varian 1992). Principally, wood and butter can be substitutes, as theory does not regard for some intrinsic characteristics why wood and butter cannot be substitutes (Lancaster 1966b).
Note that the social choice function calculates the outcome as a function of the preferences and not as a function of the messages. As Figure 2 proposes, comparing the actual outcome with the social choice function yields the assessment of the goodness of the applied mechanism. In other words, there is generally an evaluation function, U ( X ,θ ) , which “tells the designer how to value particular outcomes” (Ledyard 1993, 127) with respect to the environment. Purely allocation-oriented measures may, however, ignore that mechanism itself can create frictions or so-called transaction costs are defined as the costs of running an microeconomic system (Arrow 1969).
Market Engineering by Dirk G. Neumann