Hierarchical package bidding: A paper & pencil combinatorial auction

We introduce a new combinatorial auction format based on a simple, transparent pricing mechanism tailored for the hierarchical package structure proposed by Rothkopf, Pekeč, and Harstad to avoid computational complexity [Rothkopf, M., Pekeč, A., Harstad, R., 1998, Computationally manageable combinatorial auctions. Manage. Sci. 44, 1131-1147]. This combination provides the feedback necessary for bidders in multi-round auctions to discern winning bidding strategies for subsequent rounds and to coordinate responses to aggressive package bids. The resulting mechanism is compared to two leading alternatives in a series of laboratory experiments involving varying degrees of value synergies. Based on these “wind tunnel” tests the FCC has decided to use hierarchical package bidding in a segment of the upcoming 700 MHz auction.