Addressing the exposure problem of bidding agents using flexibly priced options

Valentin Robu, Ioannis A. Vetsikas, Enrico H. Gerding, Nicholas R. Jennings

Research output: Chapter in Book/Report/Conference proceedingConference contribution

2 Citations (Scopus)


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, and compare it to existing mechanisms, both in terms of the seller revenue and the social welfare. We show that our new mechanism achieves higher market efficiency compared to having no options and free options, while achieving higher revenues for the seller than any existing option mechanism.

Original languageEnglish
Title of host publicationProceedings of the 19th European Conference on Artificial Intelligence
EditorsHelder Coelho, Rudi Studer, Michael Wooldridge
PublisherIOS Press
Number of pages6
ISBN (Electronic)978-1-60750-606-5
ISBN (Print)978-1-60750-605-8
Publication statusPublished - 2010
Event19th European Conference on Artificial Intelligence (ECAI)/6th Conference on Prestigious Applications of Intelligent Systems (PAIS) - Lisbon, Lisbon, Portugal
Duration: 16 Aug 201020 Aug 2010

Publication series

NameFrontiers in Artificial Intelligence and Applications
ISSN (Print)0922-6389


Conference19th European Conference on Artificial Intelligence (ECAI)/6th Conference on Prestigious Applications of Intelligent Systems (PAIS)
Abbreviated titleECAI 2010

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