Optimal Auctions for Negatively Correlated Items

We consider the problem of designing revenue-optimal auctions for selling two items and bidders' valuations are independent among bidders but negatively correlated among items. Abstractly, this setting can be thought of as an instance with single-dimensional type space but multi-dimensional allocation space. Such setting has been extensively studied in the literature, but all under the assumption that the items are positively correlated. Under the positive correlation assumption, the optimal allocation rules are simple, avoiding difficulties brought by ensuring Bayesian incentive compatibility (BIC) under multi-dimensional feasibility constraints and by ensuring interim individual rationality (IIR) given the possibility that the lowest utility point may no longer be at the boundary of the type domain. However, the nice properties no longer hold when there is negative correlation among items. In this paper, we obtain the closed-form optimal auction for this setting, by directly addressing the two difficulties above. In particular, the first difficulty is that when pointwise maximizing virtual surplus under multi-dimensional feasibility (i.e., the Border feasibility), (1) neither the optimal interim allocation is trivially monotone in the virtual value, (2) nor the virtual value is monotone in the bidder's type. As a result, the optimal interim allocations resulting from virtual surplus maximization no longer guarantee BIC. To address (1), we prove a generalization of Border's theorem and show that optimal interim allocation is indeed monotone in the virtual value. To address (2), we adapt Myerson's ironing procedure to this setting by redefining the (ironed) virtual value as a function of the lowest utility point. The second difficulty, perhaps a more challenging one, is that the lowest utility type in general is no longer at the endpoints of the type interval. To address this difficulty, we show by construction that there exist an allocation rule and an induced lowest utility type such that they form a solution of the virtual surplus maximization and in the meanwhile guarantees IIR. In the single bidder case, the optimal auction consists of a randomized bundle menu and a deterministic bundle menu; while in the multiple bidder case, the optimal auction is a randomization between two extreme mechanisms. The optimal solutions of our setting can be implemented by a Bayesian IC and IR auction, however, perhaps surprisingly, the revenue of this auction cannot be achieved by any (dominant-strategy) DIC and IR auction. In other words, we have witnessed the first instance where a Bayesian IC auction yields strictly more revenue than any IC auction, resolving an important conjecture concerning whether there exists a quasi-linear setting where the optimal revenues differ under the two different solution concepts.