Auction-based bandwidth trading in a competitive hierarchical market

We deal with the problem of bandwidth allocation in a two-level hierarchical market. In the top level a unique seller allocates bandwidth to intermediate providers [e.g. Internet service providers (ISPs)], who in turn allocate their assigned shares of bandwidth to their own customers in the lower level. As we have already established, this problem can be solved efficiently by means of an incentive compatible mechanism comprising auctions in both levels; the payment rule of the lower-level auction is imposed by the top-level seller. We investigate the properties of the mechanism in case where each of the competing intermediate providers can select the payment rule on his own, under a variety of assumptions on the information possessed by the various players as well as on their level of freedom to act in the market. For one of the cases analyzed we prove that providers have no incentive to deviate from the original payment rule.