Reverse Mechanism Design

Abstract

Optimal mechanisms for agents with multi-dimensional preferences are generally complex. This complexity makes them challenging to solve for and impractical to run. In a typical mechanism design approach, a model is posited and then the optimal mechanism is designed for the model. Successful mechanism design gives mechanisms that one could at least imagine running. By this measure, multi-dimensional mechanism design has had only limited success. In this paper we take the opposite approach, which we term reverse mechanism design. We start by hypothesizing the optimality of a particular form of mechanism that is simple and reasonable to run, then we solve for sufficient conditions for the mechanism to be optimal (among all mechanisms). This paper has two main contributions. The first is in codifying the method of virtual values from single-dimensional auction theory and extending it to agents with multidimensional preferences. The second is in applying this method to two paradigmatic classes of multi-dimensional preferences. The first class is unit-demand preferences (e.g., a homebuyer who wishes to buy at most one house); for this class we give sufficient conditions under which posting a uniform price for each item is optimal. This result generalizes one of Alaei et al. [2013] for a consumer with values uniform on interval [0; 1], and contrasts with an example of Thanassoulis [2004] for a consumer with values uniform on interval [5; 6] where uniform pricing is not optimal. The second class is additive preferences, for this class we give sufficient conditions under which posting a price for the grand bundle is optimal. This result generalizes a recent result of Hart and Nisan [2012] and relates to work of Armstrong [1999]. Similarly to an approach of Alaei et al. [2013], these results for single-agent pricing problems can be generalized naturally to multi-agent auction problems.