Journal
MATHEMATICS OF OPERATIONS RESEARCH
Volume 46, Issue 4, Pages 1452-1478Publisher
INFORMS
DOI: 10.1287/moor.2020.1105
Keywords
optimal stopping; threshold rules; prophet inequality; posted price mechanisms; mechanism design; computational pricing and auctions
Funding
- Agencia Nacional de Investigacion y Desarrollo [CMM-AFB 170001]
- Fondo Nacional de Desarrollo Cientifico y Tecnologico [1190043]
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The classic prophet inequality is explored in the context of random order sequences, considering both nonadaptive and adaptive scenarios. For the nonadaptive case, an algorithm achieving an expected reward within at least a 0.632 fraction of the expected maximum is derived, with optimality proven. In the adaptive case with independent and identically distributed random variables, a tight 0.745-approximation is obtained, solving a problem posed by Hill and Kertz in 1982. The application of these prophet inequalities to posted price mechanisms shows tight bounds for both nonadaptive and adaptive scenarios when buyers arrive in random order.
The classic prophet inequality states that, when faced with a finite sequence of nonnegative independent random variables, a gambler who knows the 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 nonadaptive and an adaptive version of the problem. In the former case, the gambler sets a threshold for every random variable a priori, whereas, in the latter case, the thresholds are set when a random variable arrives. For the nonadaptive case, we obtain an algorithm achieving an expected reward within at least a 0.632 fraction of the expected maximum and prove that this constant is optimal. For the adaptive case with independent and identically distributed 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 we prove the same tight bounds for both a nonadaptive and an adaptive posted price mechanism when buyers arrive in random order.
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