Combinatorial auctions for procuring agri-environmental services: a review of some design issues

Auctions where landholders submit conservation projects for consideration in return for payment have recently gained popularity. Flexible versions of these, combinatorial auctions, which allow for the simultaneous submission of bids on different combinations of projects, have recently been tested for conservation purposes. Combinatorial auctions allow bidders to exploit synergies in the execution of multiple conservation activities while the auction mechanism stimulates competition among potential participants, enabling the auctioneer (or government) to secure a cost-effective set of conservation projects. Combinatorial auctions have the potential to improve outcomes beyond what is possible with the simple auctions explored in trials over the last decade in many parts of Australia. This article reviews the state of the art in the design of combinatorial auctions with a particular focus on conservation auctions. Key design issues identified are the problem of determining the winning bid, pricing formats, and iterative bidding formats where bidders are able to revise their bids before a final selection is made.