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Ingenious, but also a bit alien to this world, this reputation clings to many Nobel Prize winners. This year’s Nobel laureate in economics, Robert Wilson, did not appear to be an exception when asked about practical experience with his research topic shortly after his award was announced.
“I may never have participated in an auction,” the 83-year-old laughed. Then, apparently after the background intervention, Wilson added: “My wife points out that we buy ski boots on Ebay. I assume this is an auction.”
In fact, it is a real-life subject for which Wilson and his former PhD student Paul Milgrom (72) are now being honored with the Alfred Nobel Prize in Economics, also known as the Nobel Prize in Economics. After all, everyone knows the principle of auctions, also thanks to the Internet auction house mentioned by Wilson. Its first predecessor was founded in 1674 in Stockholm. There, the Swedish Academy of Sciences announced the honor of Wilson and Milgrom, and dropped an auction hammer as a little joke.
The picture auction at Sotheby’s or the ski boots on Ebay are comparatively simple examples of auctions. They are now also used for much more complex products, such as CO₂ certificates, electricity, or advertisements in online search engines. Wilson and Milgrom have investigated how such auctions can be organized in the most efficient way possible. He was interested in both the behavior of the bidders and the influence of the type of auction on the result.
Fight the winner’s curse
In addition to the so-called English auction with increasing bids, there is also a Dutch version in which the prices go down until a buyer is found. In the first variant, bidders get an impression of the maximum value that their competitors place on a product if they leave the competition. This information is completely absent from the Dutch auction. This increases the risk of the so-called winner’s curse (winner’s curse) to be successful: After winning the auction, a bidder discovers that he has paid an inflated price.
Sellers are also interested in well-organized auctions, for example, the US government This originally awarded mobile radio frequencies through a so-called beauty contest – companies had to advertise to obtain a license. As a result, a lot of money was invested in lobbying, but the state received comparatively little.
When the number of mobile phone providers grew rapidly in the 1990s, the process was no longer practical. The responsible regulatory authority, the FCC, went on to raffle licenses. Again, this only brought in manageable income. Since the draws were conducted on a regional basis, operators were often only able to bid for different frequencies in dispersed regions, which is not a basis for good service.
This is where Wilson and Milgrom come in. They developed a new format, the Simultaneous Multiple Round Auction (SMRA). In this case, all items are offered at the same time with ascending bids and in multiple rounds. This reduces the uncertainty for bidders and therefore the risk of being hit by the winner’s curse.
Wilson and Milgrom lobbied very hard “for SMRA at the FCC, says Justus Haucap, former director of the German Monopoly Commission. Successfully: In July 1994, the FCC used SMRA for the first time. In a total of 47 rounds, it auctioned ten licenses and raised a total of $ 617 million. For more than 20 years, the auction format even generated $ 120 billion.
“How stupid were we really?”
This had a signal effect for governments around the world, recalls Haucap, who attended a summer academy with Wilson shortly after the first auctions. Many governments would have wondered regarding their licenses: “How stupid were we really that we always gave them all for free?” Numerous countries have now tried the auction process, including Germany.
In this country, the UMTS license auction in 2000 was particularly well known, generating nearly 100 billion D-marks for the state, a price tag of the Internet euphoria at the turn of the millennium that later turned out to be completely overvalued. Meanwhile, providers have become more cautious, with the 5G license auction generating around 6.5 billion euros last year.
In any case, auction researchers are concerned not only with revenue, but also with the efficient allocation of resources. In the face of the crown crisis, Wilson and his colleagues proposed an approach to better distribute scarce medical aid. This could be done using an artificial currency, a principle already used by American food banks.
Even if Wilson initially didn’t want to have any personal auction experience, he and his co-winner are completely down to earth. His theories are “a good example of how basic research leads to inventions that benefit society,” praises the Swedish Academy of Sciences. What is special is “that the same people developed the theory and its practical applications.” Haucap sees it in a similar way. Milgrom is a theorist, he says. “But with an incredibly high level of practical influence.”
