The Applicant Auction for Top-Level Domains: Using an Auction to Efficiently Resolve Conflicts Among Applicants

The prospect of using auctions to resolve conflicts among parties competing for the same top-level internet domains is described. In such an auction the winner’s payment is divided among the losers, whereas if the conflict is not resolved then ICANN will conduct an auction and retain the winner’s payment. For first-price and second-price sealed-bid auctions, we characterize equilibrium bidding strategies and provide examples, assuming bidders’ valuations are distributed independently and are either symmetrically or asymmetrically distributed. The qualitative properties of equilibria reveal novel features; for example, in a second-price auction a bidder might bid more than her valuation in order to drive up the winner’s payment. Even so, examples indicate that in symmetric cases a bidder’s expected profit is the same in the two auction formats. We then test in the experimental lab two auction formats that extent the setting from a single domain to the actual setting with many domains. The first format is a sequential first-price sealed-bid auction; the second format is a simultaneous ascending clock auction. The framing and subjects were chosen to closely match the actual setting. Subjects were PhD students at the University of Maryland in Economics, Computer Science, and Computer Engineering, with training in game theory and auction theory. Each subject played the role of an actual company (e.g., Google) and bid for domains (e.g., .book) consistent with the company’s applications. Subjects were given instructions explaining the auction and the equilibrium theory for the single-item case in relevant examples. Both formats achieved auction efficiencies of 98% in the lab. This high level of efficiency is especially remarkable in the case with asymmetric distributions—the format performed better than the simple single-item equilibrium despite the presence of budget constraints in the lab. This experiment together with previous results on the robustness of ascending auctions in general and simultaneous ascending clock auctions in particular suggest that the simultaneous ascending clock auction will perform best in this setting.