When the Victorian Government released new water in Port Phillip Bay for mussel farming, the CMD was asked to design and implement the allocation mechanism. The value of sites for mussel production is partly influenced by the proximity to other sites.
Many aquaculture farmers are interested in buying different, often overlapping, combinations of sites. Their willingness to pay for a given site may therefore depend on which other sites they receive. This is known as a package problem: each farmer wants to buy a package of sites. Academics have shown that a simple allocation system where each site is auctioned individually performs poorly in terms of both efficiency and profitability as it does not account for the fact that farmers often want to combine different sites.
Professor Charlie Plott from the California Institute of Technology worked with CMD staff to design a combinatorial auction that allowed bidders to assemble packages of aquaculture sites. Although the auction design was complex requiring an electronic platform, bidders readily engaged with the bidding process allowing them to resolve the combinatorial package allocation problem without exposure to risk. The experience of the winners of sites was that the auction system helped them readily assemble the sites they valued. For losing bidders, the system avoided exposure to unwanted sites. This type of auction has many applications to other resource allocation problems and to procurement tasks that involve package problems.
Aquaculturist, Lance Wiffen, participated in the auction. He reflects on the process in these three short videos.