Randomization Beats Second Price as a Prior-Independent Auction

Abstract

Designing revenue optimal auctions for selling an item to $n$ symmetric bidders is a fundamental problem in mechanism design. Myerson (1981) shows that the second price auction with an appropriate reserve price is optimal when bidders' values are drawn i.i.d. from a known regular distribution. A cornerstone in the prior-independent revenue maximization literature is a result by Bulow and Klemperer (1996) showing that the second price auction without a reserve achieves (n-1)/n of the optimal revenue in the worst case. We construct a randomized mechanism that strictly outperforms the second price auction in this setting. Our mechanism inflates the second highest bid with a probability that varies with $n$. For two bidders we improve the performance guarantee from 0.5 to 0.512 of the optimal revenue. We also resolve a question in the design of revenue optimal mechanisms that have access to a single sample from an unknown distribution. We show that a randomized mechanism strictly outperforms all deterministic mechanisms in terms of worst case guarantee.