Fair Discounting Auctions

An auctioneer sells a single unit to a group of bidders using a second price auction. A subset of these bidders possess a coupon entitling them to a discount off the winning bid in the event they win the auction. Bidders without the coupon are at a disadvantage relative to the situation when nobody has any coupons. Therefore, in a loose sense, these bidders end up sponsoring the coupon, at least partially. Furthermore the resulting allocation need not be efficient. Is there an alternative mechanism that would allow the auctioneer to offer discount coupons to a set of bidders while not harming the rest. In other words is it possible that the discount coupons are fully sponsored by the auctioneer. In this paper we propose desiderata that such a mechanism should have and bound their inefficiency.1 The question is motivated by a longstanding discount offered by Google to its AdWords customers. For every dollar spent in AdWords, one receives free processing on $10 at Google Checkouttheir standard rates are 2% of the transaction amount plus a $0.20 fixed charge. In effect, a customer who signs up with Google checkout receives a discount in the AdWords auction.