Merkato allows you to select between two strategies for pricing bandwidth on the spot market: static and dynamic.
The static strategy is Merkato’s basic mode of operation. This strategy is based on the second price auction mechanism¾the successful bidder obtains the item being auctioned at a price based on the amount offered by the highest unsuccessful bidder. In the case of bandwidth, this is the price offered by the highest losing bids for the same amount of bandwidth the buyer receives. If the total amount of bandwidth requested by the losing bidder is less than that of the successful bidder, the difference is made up using the floor price. (See “Merkato Auction Mechanism: The Progressive Second Price Auction.”)
The disadvantage of this selling strategy is that, because buyers are allowed to bid many times during an auction cycle, until they are satisfied with their allocation, there are rarely any unsuccessful bidders. Using this method, virtually every auction would close at the floor price. Merkato solves this problem by offering the option to base pricing on the lowest successful bid rather than the highest unsuccessful ones. This is the dynamic strategy.
This alternative pricing paradigm is created without changing the auction rules used under the static selling strategy. Under the dynamic selling strategy, an agent you create bids for all the bandwidth at a price high enough to just barely lose. Since the highest losing bid is the price everyone pays, this agent creates the basis for the pricing for all bidders in the “second price” auction. Since the dynamic seller bids barely below the price offered for the last unit of bandwidth, it never purchases bandwidth itself. (It will, however, purchase bandwidth to maintain the floor price, if necessary.) The action of the dynamic seller can be monitored in the auction graph and auction table in the desktop interface. (See “Auction Graph” and “Auction Table.”)