The Referrer's Dilemma
25 Pages Posted: 10 Feb 2020 Last revised: 20 Apr 2020
Date Written: January 31, 2020
If buyers can only participate via referrals, referral monotonicity holds in the Vickrey-Clarke-Groves (VCG) mechanism, i.e., any buyer's payoff weakly increases as her connection (i.e., referable buyers) expands. However, if every buyer expands her connection, buyers are weakly worse off and the seller is weakly better off, which we call the referrer's dilemma. The referrer's dilemma occurs in any mechanism that is referral monotone, individually rational, threshold-pricing, and rewarding for individual contribution. We also show that in the VCG mechanism, the winner is better off and the seller is worse off under the referrer's dilemma with shill bidding.
Keywords: referral network, auction, shill bidding, strategy-proofness, monotonicity, VCG, multilevel mechanism
JEL Classification: D44, D71, D82, D85
Suggested Citation: Suggested Citation