The Applicant Auction for Top-Level Domains: Using an Auction to Efficiently Resolve Conflicts Among Applicants

The prospect of using auctions to resolve conflicts among parties competing for the same top-level internet domains is described. In such an auction the winner’s payment is divided among the losers, whereas if the conflict is not resolved then ICANN will conduct an auction and retain the winner’s payment. For first-price and second-price sealed-bid auctions, we characterize equilibrium bidding strategies and provide examples, assuming bidders’ valuations are distributed independently and are either symmetrically or asymmetrically distributed. The qualitative properties of equilibria reveal novel features; for example, in a second-price auction a bidder might bid more than her valuation in order to drive up the winner’s payment. Even so, examples indicate that in symmetric cases a bidder’s expected profit is the same in the two auction formats. We then test in the experimental lab two auction formats that extent the setting from a single domain to the actual setting with many domains. The first format is a sequential first-price sealed-bid auction; the second format is a simultaneous ascending clock auction. The framing and subjects were chosen to closely match the actual setting. Subjects were PhD students at the University of Maryland in Economics, Computer Science, and Computer Engineering, with training in game theory and auction theory. Each subject played the role of an actual company (e.g., Google) and bid for domains (e.g., .book) consistent with the company’s applications. Subjects were given instructions explaining the auction and the equilibrium theory for the single-item case in relevant examples. Both formats achieved auction efficiencies of 98% in the lab. This high level of efficiency is especially remarkable in the case with asymmetric distributions—the format performed better than the simple single-item equilibrium despite the presence of budget constraints in the lab. This experiment together with previous results on the robustness of ascending auctions in general and simultaneous ascending clock auctions in particular suggest that the simultaneous ascending clock auction will perform best in this setting.

Speaker Details

Peter Cramton is Professor of Economics at the University of Maryland. Since 1983, he has conducted research on auction theory and practice. This research appears in the leading economics journals. The main focus is the design of auctions for many related items. Applications include spectrum auctions, electricity auctions, and treasury auctions. On the practical side, he is Chairman of Market Design Inc., an economics consultancy founded in 1995, focusing on the design of auction markets. He also is Founder and Chairman of Cramton Associates LLC, which since 1993 has provided expert advice on auctions and market design. Since 2001, he has played a lead role in the design and implementation of electricity auctions in France and Belgium, gas auctions in Germany, and the world’s first auction for greenhouse gas emissions held in the UK in 2002. He has advised numerous governments on market design and has advised dozens of bidders in high-stake auction markets. Since 1997, he has advised ISO New England on electricity market design and was a lead designer of New England’s forward capacity auction. He led the design of electricity and gas markets in Colombia, including the Firm Energy Market, the Forward Energy Market, and the Long-term Gas Market. Since June 2006, he played a leading role in the design and development of Ofcom’s spectrum auctions in the UK. He has advised the UK, the US, and Australia on greenhouse gas auction design. He led the development of the FAA’s airport slot auctions for the New York City airports. He received his B.S. in Engineering from Cornell University and his Ph.D. in Business from Stanford University.

Peter Cramton
University of Maryland