Posted Price Mechanisms and Optimal Threshold Strategies for Random Arrivals

José Correa, Patricio Foncea, Ruben Hoeksma, Tim Oosterwijk, Tjark Vredeveld

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

The classic prophet inequality states that, when faced with a finite sequence of non-negative independent random variables, a gambler who knows their distribution and is allowed to stop the sequence at any time, can obtain, in expectation, at least half as much reward as a prophet who knows the values of each random variable and can choose the largest one. In this work we consider the situation in which the sequence comes in random order. We look at both a non-adaptive and an adaptive version of the problem. In the former case the gambler sets a threshold for every random variable a priori, while in the latter case the thresholds are set when a random variable arrives. For the non-adaptive case, we obtain an algorithm achieving an expected reward within at least a 1-1/e fraction of the expected maximum and prove this constant is optimal. For the adaptive case with i.i.d. random variables, we obtain a tight 0.745-approximation, solving a problem posed by Hill and Kertz in 1982.
We also apply these prophet inequalities to posted price mechanisms, and prove the same tight bounds for both a non-adaptive and an adaptive posted price mechanism when buyers arrive in random order.
Original languageEnglish
Pages (from-to)1452-1478
JournalMathematics of Operations Research
Volume46
Issue number4
Early online date11 Mar 2021
DOIs
Publication statusPublished - 30 Nov 2021

Keywords

  • Optimal stopping
  • Threshold rules
  • Prophet inequality
  • Posted price mechanisms
  • Mechanism design
  • Computational pricing and auctions

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