Design, Analysis and Simulation of the Progressive Second Price Auction for Network Bandwidth Sharing

We present the Progressive Second Price auction, a new decentralized mechanism for allocation of variable-size shares of a resource among multiple users. Unlike most mechanisms in the economics litterature, PSP is designed with a very small message space, making it suitable for real-time market pricing of communication bandwidth. Under elastic demand, the PSP auction is incentive compatible and stable, in that it has a ``truthful'' $\epsilon$-Nash equilibrium where all players bid at prices equal to their marginal valuation of the resource. PSP is efficient in that the equilibrium allocation maximizes total user value. The equilibrium holds when PSP is applied by independent resource controllers on each link of a network with arbitrary topology, with users having arbitrary but fixed routes. In the network case, the distributed mechanism has a further incentive compatibility in that submitting the same bid at all links along the route is an optimal strategy for each user, regardless of other players' actions. Using a prototype implementation of the auction game on the Internet, we investigate how convergence times scale with the number of bidders, as well as the trade-off between economic efficiency and signalling load. Finally, we provide a rate-distortion theoretic basis for valuation of bandwidth, which leads naturally to the elastic demand model that is assumed in the analysis of the mechanism.