Periodic Reporting for period 4 - SUEE (Strategic Uncertainty in Economic Environments)
Berichtszeitraum: 2022-08-01 bis 2024-01-31
This research consists of two sets of projects: Strategic Uncertainty in Economic Environments (SUEE) and Online Advertisement Auctions (OAA).
Part 1-SUEE: Equilibrium models in economics assume that agents know how others behave. Hence, whereas agents may be uncertain about fundamental parameters of the environment, they face no “strategic uncertainty” (SU). Yet, as testified by the existence of a large industry that sells data about agents' strategies, SU is pervasive in economically important environments. The objective of Part 1 is to favour a better integration of models of SU within standard economics.
Part 1.1 approaches the problem of SU from a behavioural viewpoint. It extends existing models of strategic reasoning (e.g. level-k, cognitive hierarchies, etc.), to account for the responsiveness of individuals’ reasoning to the economic incentives. We explore: (i) the foundations and the implications of modelling the reasoning process of boundedly rational agents as a cost-benefit analysis, in which cognitive costs are weighed against the agent’s assessment of the benefits of reasoning;(ii) whether individuals take others’ incentives to reason into account; and (iii) the conditions under which the problem of SU can be solved based on purely introspective reasoning.
Part 1.2 approaches the problem of SU from a classical viewpoint, i.e. under the standard assumptions for fully rational and ‘infinitely sophisticated’ (Rationality and Common Belief in Rationality (RCBR)), from both a game theoretic and mechanism design perspective.
Part 2-OAA: Search engines and social media sell advertisement space on their pages using auctions. This is a huge market with an annual growth of 10% and a total value of 50 billion dollars (2013, US). An increasing fraction of advertisers delegate their bids to specialised Digital Marketing Agencies (DMA), which often bid in the same auctions on behalf of different advertisers and may thus manipulate the auctions and lower the bids of their clients. We analyse the impact of DMAs on the performance of the auctions to identify the optimal strategies for the DMAs to coordinate their bids, their effects on the revenues and efficiency of the auction formats, and to generate insights on possible modifications to the auction mechanisms.
Part 1-SUEE: Equilibrium models in economics assume that agents know how others behave. Hence, whereas agents may be uncertain about fundamental parameters of the environment, they face no “strategic uncertainty” (SU). Yet, as testified by the existence of a large industry that sells data about agents' strategies, SU is pervasive in economically important environments. The objective of Part 1 is to favour a better integration of models of SU within standard economics.
Part 1.1 approaches the problem of SU from a behavioural viewpoint. It extends existing models of strategic reasoning (e.g. level-k, cognitive hierarchies, etc.), to account for the responsiveness of individuals’ reasoning to the economic incentives. We explore: (i) the foundations and the implications of modelling the reasoning process of boundedly rational agents as a cost-benefit analysis, in which cognitive costs are weighed against the agent’s assessment of the benefits of reasoning;(ii) whether individuals take others’ incentives to reason into account; and (iii) the conditions under which the problem of SU can be solved based on purely introspective reasoning.
Part 1.2 approaches the problem of SU from a classical viewpoint, i.e. under the standard assumptions for fully rational and ‘infinitely sophisticated’ (Rationality and Common Belief in Rationality (RCBR)), from both a game theoretic and mechanism design perspective.
Part 2-OAA: Search engines and social media sell advertisement space on their pages using auctions. This is a huge market with an annual growth of 10% and a total value of 50 billion dollars (2013, US). An increasing fraction of advertisers delegate their bids to specialised Digital Marketing Agencies (DMA), which often bid in the same auctions on behalf of different advertisers and may thus manipulate the auctions and lower the bids of their clients. We analyse the impact of DMAs on the performance of the auctions to identify the optimal strategies for the DMAs to coordinate their bids, their effects on the revenues and efficiency of the auction formats, and to generate insights on possible modifications to the auction mechanisms.
Part 1.1
- “Cost-Benefit Analysis in Reasoning” (Alaoui and Penta, 2022) analyses the foundations of a cost-benefit approach to reasoning, by identifying the primitive properties of reasoning that must hold for the decision to stop thinking to be represented by a cost-benefit analysis. We identify additional properties that give more structure to the value-of-reasoning function and show that the cost-benefit model applies to a variety of settings, including R&D applications in Industrial Organization, models of Response Time in individual decision-making, and models of Strategic Reasoning.
- “Reasoning about others’ reasoning” (Alaoui, Janezic and Penta, 2020) studies to what extent individuals’ behaviour in games is driven by their reasoning about others’ cognitive capacities, as opposed to their own cognitive limitations.
- “Coordination and Sophistication” (Alaoui, Janezic and Penta, 2023) shows that a large class of reasoning processes, the cost-benefit approach delivers sharp results about a long-lasting question in game theory. That is, whether equilibrium coordination can emerge, in the absence of focal points, as the outcome of purely introspective reasoning. We show that this is the case if players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, being of higher cognitive sophistication is not necessarily beneficial to the agent: in some coordination games, the opposite is true.
Part 1.2
- “Efficient Implementation via Transfers: Uniqueness and Sensitivity in Symmetric Environments” (Ollár and Penta, 2022) and “A Network Solution to Robust Implementation: The Case of Identical but Unknown Distributions” (Ollár and Penta, 2023) identify the conditions under which, with minimal information about agents’ beliefs, monetary incentives can be designed to extract agents’ private information, so as to induce socially desirable goals, while at the same time eliminating SU.
- “Safe Implementation” (Gavan and Penta, 2023) introduces a new framework that allows to accommodate, within classical implementation theory, a variety of extra desiderata that include robustness with respect to mistakes in play, model misspecification, behavioural considerations, and others.
- "Rationalizability, Observability, and Common Knowledge” (Penta and Zuazo-Garin, 2022) provides a systematic analysis of SU when players face higher-order uncertainty over the observability of their moves. It shows that key game theoretic insights on the determinants of strategic advantage are fragile, and in fact overturned, when one considers even small departures from the standard assumptions on the observability of actions. Our result is consistent with a wide body of experimental evidence.
Part 2
- “Marketing Agencies and Collusive Bidding in Online Ad Auctions” (Decarolis, Goldmanis and Penta, 2020) provides a theoretical analysis of the questions that DMAs face in the online ad auctions.
-“Bid Coordination in Sponsored Search Auctions: Detection Methodology and Empirical Analysis” (Decarolis, Goldmanis, Shakhgildyan and Penta, 2023) provides an empirical methodology to detect coordinated bidding and to estimate bounds on the revenue losses it entails.
- “Market Effects of Sponsored Search Auctions” (Motta and Penta, 2023) provides a theoretical analysis of the market effects of brand search advertising.
The results of the project have been presented in tens of seminars and conferences worldwide, including keynotes and plenary or semi-plenary talks. The project has funded the organisation of seven workshops. The results of Part 2 have also been presented at the Dutch Competition Authority (ACM).
- “Cost-Benefit Analysis in Reasoning” (Alaoui and Penta, 2022) analyses the foundations of a cost-benefit approach to reasoning, by identifying the primitive properties of reasoning that must hold for the decision to stop thinking to be represented by a cost-benefit analysis. We identify additional properties that give more structure to the value-of-reasoning function and show that the cost-benefit model applies to a variety of settings, including R&D applications in Industrial Organization, models of Response Time in individual decision-making, and models of Strategic Reasoning.
- “Reasoning about others’ reasoning” (Alaoui, Janezic and Penta, 2020) studies to what extent individuals’ behaviour in games is driven by their reasoning about others’ cognitive capacities, as opposed to their own cognitive limitations.
- “Coordination and Sophistication” (Alaoui, Janezic and Penta, 2023) shows that a large class of reasoning processes, the cost-benefit approach delivers sharp results about a long-lasting question in game theory. That is, whether equilibrium coordination can emerge, in the absence of focal points, as the outcome of purely introspective reasoning. We show that this is the case if players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, being of higher cognitive sophistication is not necessarily beneficial to the agent: in some coordination games, the opposite is true.
Part 1.2
- “Efficient Implementation via Transfers: Uniqueness and Sensitivity in Symmetric Environments” (Ollár and Penta, 2022) and “A Network Solution to Robust Implementation: The Case of Identical but Unknown Distributions” (Ollár and Penta, 2023) identify the conditions under which, with minimal information about agents’ beliefs, monetary incentives can be designed to extract agents’ private information, so as to induce socially desirable goals, while at the same time eliminating SU.
- “Safe Implementation” (Gavan and Penta, 2023) introduces a new framework that allows to accommodate, within classical implementation theory, a variety of extra desiderata that include robustness with respect to mistakes in play, model misspecification, behavioural considerations, and others.
- "Rationalizability, Observability, and Common Knowledge” (Penta and Zuazo-Garin, 2022) provides a systematic analysis of SU when players face higher-order uncertainty over the observability of their moves. It shows that key game theoretic insights on the determinants of strategic advantage are fragile, and in fact overturned, when one considers even small departures from the standard assumptions on the observability of actions. Our result is consistent with a wide body of experimental evidence.
Part 2
- “Marketing Agencies and Collusive Bidding in Online Ad Auctions” (Decarolis, Goldmanis and Penta, 2020) provides a theoretical analysis of the questions that DMAs face in the online ad auctions.
-“Bid Coordination in Sponsored Search Auctions: Detection Methodology and Empirical Analysis” (Decarolis, Goldmanis, Shakhgildyan and Penta, 2023) provides an empirical methodology to detect coordinated bidding and to estimate bounds on the revenue losses it entails.
- “Market Effects of Sponsored Search Auctions” (Motta and Penta, 2023) provides a theoretical analysis of the market effects of brand search advertising.
The results of the project have been presented in tens of seminars and conferences worldwide, including keynotes and plenary or semi-plenary talks. The project has funded the organisation of seven workshops. The results of Part 2 have also been presented at the Dutch Competition Authority (ACM).
The results in Part 1.1 are important from a methodological viewpoint, to identify the limits of the cost-benefit approach to model reasoning processes, and from a positive viewpoint, by shedding light on little understood aspects of strategic reasoning and incentives. The results on coordination and sophistication address a long-lasting question in game theory, and shed light on the broader relationship between cognitive abilities, strategic sophistication, and economic performance.
The results in Part 1.2 change the received wisdom on fundamental game-theoretic insights about the sources of equilibrium coordination under SU, the determinants of the strategic advantage, and the possibility to solve the problem of SU while at the same time achieving socially desirable outcomes via simple monetary incentives.
Part 2 sheds light on key recent trends in a very important market. The results show that the diffusion of DMAs can significantly erode the revenues of the main digital platforms, and hence that further innovations should be expected, as the platforms will have the incentives to react and adjust their auction mechanisms. The impact on consumers’ welfare is ambiguous, and depends on several details of the environment. This line of research spells out some of such determinants, and advances our understanding of societal welfare in these important markets.
The results in Part 1.2 change the received wisdom on fundamental game-theoretic insights about the sources of equilibrium coordination under SU, the determinants of the strategic advantage, and the possibility to solve the problem of SU while at the same time achieving socially desirable outcomes via simple monetary incentives.
Part 2 sheds light on key recent trends in a very important market. The results show that the diffusion of DMAs can significantly erode the revenues of the main digital platforms, and hence that further innovations should be expected, as the platforms will have the incentives to react and adjust their auction mechanisms. The impact on consumers’ welfare is ambiguous, and depends on several details of the environment. This line of research spells out some of such determinants, and advances our understanding of societal welfare in these important markets.