Mechanisms for coalition formation and cost sharing in an electronic marketplace

In this paper we study the mechanism design problem of coalition formation and cost sharing in an electronic marketplace, where buyers can form coalitions to take advantage of discounts based on volume. The desirable mechanism properties include stability (being in the core), and incentive compatibility with good eficiency, concepts from the perspectives of cooperative and non-cooperative game theory. We first analyze the problem from both these perspectives. We show the impossibility to simultaneously satisfy efficiency, budget balance and individual rationality at a Bayesian-Nash equilibrium, and propose a mechanism in the core of the game. We then present a group of reasonable mechanisms that are derived from the two perspectives, and evaluate their performance in incentive compatibility. Empirical results show positive correlation between stability and incentive compatibility(which is in turn related to efficiency). The mechanism which shares the coalition cost in an egalitarian way is the best in terms of both stability and incentive compatibility.

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