Question

Vickrey-Clarke-Groves mechanism seems to be a good solution to the public good problem. But we do not see a frequent application of it in real world. What could be the reason(s) of this situation? Do some search, explain the weaknesses of the mechanism.

Answer 1

Vickrey auctions were rare in 1990 (see Rothkopf et al.
1990) and remain so, and as far as I know, no one has conducted a general VCG process (i.e., not just a simple Vickrey auction or a market-clearing price auction of identical items) in real commerce. There are important practical reasons for this.

Here is a list of the reasons
discussed in this paper:
• the fact that the dominant strategy equilibrium is a
weak equilibrium and there may exist alternative weak
equilibria;
• the nonexistence of dominant strategy equilibria in
models that include reasonable bid preparation costs;
• the exponential growth of effort related to bid prepa-
ration and bid communication;
• the NP completeness of the winner determination
problem;
• problems related to capital limited bidders;
• problems associated with the disclosure of valuable
confidential information;

• problems associated with various kinds of cheating
including:false bids by the bid taker,conspiracies by competing bidders, conspiracies in two-sided markets between bidders offering to sell and those offering to buy, andthe use of false-name bids by single bidders;
• the fact that strategies in sequences of strategy-proof
auctions may not be strategy-proof; and
• the fact that the process can be revenue deficient.

Weakness

One important problem is the winner determination problem, which is to label bids as accepted or rejected to maximize the total value of the bids accepted (or, in the case of a reverse auction, to minimize their total value), under the constraint that the corresponding allocation of items does not require more items than are available (or, in the case of a reverse auction, under the constraint that all the desired items are procured).
Another key problem in auctions and exchanges (combinatorial or not) is that in general, the bidders may not bid their true valuations for the goods. The problem with untruthful bidding is that the winner determination algorithm can only base the final allocation of the goods on the reported valuations, and thus the final allocation may not be optimal relative to the bidders’ true valuations. Thus, economic efficiency may be lost.

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