An efficient auction-based mechanism for hierarchically structured bandwidth markets

We consider a hierarchical business model for selling bandwidth in a single link. In the top level of the market the social planner allocates bandwidth to intermediate providers, who in turn allocate their assigned shares of bandwidth to the customers in the lower level. We propose an innovative mechanism comprising an appropriate auction in each level; the payment rule of the lower-level auction is imposed by the social planner. We establish that the bidders of all auctions have the incentives both to participate uninhibitively and to bid truthfully, as well as that overall efficiency is ultimately attained. We also investigate the properties of the mechanism in case where each of the competing intermediate providers can select the payment rule on his own, under a variety of assumptions on the information possessed by the various players as well as on their level of freedom to act in the market. For one of the cases analyzed we prove that providers have no incentive to deviate from the original payment rule.