An efficient auction-based mechanism for hierarchically structured bandwidth markets * Marina Bitsaki a, * , George D. Stamoulis b , Costas Courcoubetis b a Department of Computer Science, University of Crete, P.O. Box 2208, Heraklion GR 71409, Greece b Network Economics and Services Group (N. E. S.), Department of Informatics, Athens University of Economics and Business, 76 Patision Street, Athens, GR 10434, Greece Available online 12 September 2005 Abstract 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. q 2005 Elsevier B.V. All rights reserved. Keywords: Bandwidth markets; Auctions; Efficiency; Competition; Hierarchical allocation 1. Introduction There has been a considerable growth of bandwidth markets in recent years. The rapid increase of demand for bandwidth and the lack of precise information about the demand and other characteristics of such markets motivates the use of auction mechanisms to allocate bandwidth to those customers that value it the most. There have been published several studies of allocating network resources by means of auction mechanisms. Lazar and Semret propose in Ref. [1] the Progressive Second Price (PSP) auction for the allocation of a divisible resource in a link without any a priori knowledge of demand. Maille ´ and Tuffin propose in Ref. [2] a one-shot multi-bid auction scheme that is related to PSP for the allocation of a divisible resource in a link. Courcoubetis et al. present in Ref. [3] a descending auction for bandwidth allocation over paths, where bids are placed simultaneously and independently in each link. Ausubel presents in Ref. [4] the Ascending Clock Auction with Clinching (ACC). Under a certain information model, this is an efficient mechanism for selling multiple identical goods. It can be applied to allocating directly the bandwidth of a single link. In this article, we study the general case of a business model for bandwidth provision, which involves multiple interacting providers corresponding to different levels of the market’s value-chain. Indeed, in the presence of large and distributed sets of customers, their direct transaction with the resource’s actual owner is either impossible, or entails high procedural and physical overheads. Thus, rather than selling his resources directly, the owner prefers to simplify the selling procedure by assigning it to a few intermediaries. This motivates studying a hierarchical market model. In this article, we formulate a new resource allocation problem: allocation of bandwidth of a single link in a two-level hierarchical market. In the top level the social planner allocates bandwidth to intermediate providers [e.g. Internet Computer Communications 29 (2006) 911–921 www.elsevier.com/locate/comcom 0140-3664/$ - see front matter q 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.comcom.2005.08.012 * The main parts of this article were presented in the 4th International Workshop on Advanced Internet Charging and QoS Technologies (ICQT’04), Barcelona, Spain, September 2004 and in the 1st International Conference on Next Generation Internet Networks—Traffic Engineering (NGI’05), Rome, Italy, April 2005. * Corresponding author. E-mail addresses: marina@csd.uch.gr (M. Bitsaki), gstamoul@aueb.gr (G.D. Stamoulis), courcou@aueb.gr (C. Courcoubetis).