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Original title: Unlocking of the Nobel Prize in Economics for the auction theory “One Hammer”
With much anticipation, at 5:45 p.m. on October 12 Beijing time, the winners of the 2020 Nobel Prize in Economics were announced. Economists Paul R. Milgrom and Robert Wilson of Stanford University (Robert B. Wilson) won this honor. As world-renowned auction designers, Paul Milgrom and Robert Wilson’s “improvement of auction theory and invention of new auction formats” became the main reasons for their awards.
The “mentor and mentee” that can’t be ignored
“I’ve never actually participated in an auction.” At the post-awards press conference, when asked about the latest vintage at auction, 83-year-old Robert Wilson said candidly.
But this does not prevent Robert Wilson from becoming a leader in the field of auction theory.
Robert Wilson was born in Nebraska in 1937, entered Harvard University on a full scholarship for a bachelor’s degree, and subsequently received a master’s and doctorate in business administration from Harvard; later, Robert Wilson moved from the East Coast of the United States. To California. After working briefly at the University of California, Los Angeles, he entered Stanford University in 1964 and has been teaching ever since.
A member of the National Academy of Sciences, a researcher, former officer and board member of the Econometric Society, he was awarded the title of “Outstanding Investigator” by the American Economic Association … Robert Wilson has received numerous honors.
Coincidentally, this time the other winner, Paul Milgrom, completed his doctoral thesis under his guidance. Paul Milgrom was born in Detroit, Michigan, USA in 1948. He studied at Stanford University in his early years and earned a master’s degree in statistics and a doctorate in economics.
In the field of auctions, this contribution to the master and the apprentice cannot be ignored.
As an expert on game theory and its applications, Wilson has published a series of academic papers on predatory pricing and price wars. Since the 1980s, Wilson’s research on the theory and application of auction mechanism design has achieved important results, and he has become an expert in auction and tender mechanism design in the fields of telecommunications, transportation and energy.
In the field of auctions, Robert Wilson’s important contribution is to develop the theory of auctions for items of common value. This value is uncertain in advance, but in the end they are all equal, for example, the future value of radio frequency or the amount of minerals in a specific area. . Based on this theory, Wilson explained why rational bidders tend to place their bid prices below their best estimate of common value: they worry about the winning bidder curse, that is, paying too much and losing.
Paul Milgrom formulated a more general auction theory, allowing not only common value, but also private value between different bidders. He analyzed the bidding strategies in a variety of well-known auction formats and demonstrated that when bidders understand the estimated value of others during the bidding process, this format will provide sellers with higher expected returns. His “relevant evaluation”, “connection principle” and the design of the “simultaneous auction auction” have greatly enriched the content of the auction theory.
“The largest auction in history”
The theory is just the first step. Not only did the two economists clarify how auction works and why bidders behave in a specific way, they also used their theory to invent a new type of auction for goods and services.
Traditional economic theories generally do not pay attention to the specific process of price formation, while auction theory effectively explains the internal mechanism of price formation in a market economy, that is, when the rules are clear, the market participants under conditions of asymmetric information they should use what Commodity acquisition price, that is, how the prices of commodities converge to equilibrium prices under conditions of asymmetric economic information.
In 1994, the Federal Telecommunications Commission (FCC) auction of spectrum licenses made this new type of auction famous. On July 24 of that year, the FCC’s first spectrum auction was held at the Omni Shoreham Hotel in Washington. After a total of 47 auction rounds over 5 days, the five spectrum licenses finally belonged to them at reasonable prices.
Different people have cards and the one with the highest price wins. This is the basic principle of auctions. However, in specific operations, different auction designs will greatly affect the final ownership and transaction price of the lot. What kind of auction mechanism should be adopted to allow spectrum licenses to fall into the hands of those who can use it more reasonably and at the same time obtain a more reasonable transaction price? This is not a small trial and spectrum licenses are difficult to price. Article. After much argumentation, the previous auction finally chose the up bid auction mechanism.
“The New York Times” called it “the largest auction in history,” and in the panel of experts who designed the rules for this auction, the most critical figure was Paul Milgrom.
The great success of the 1994 auction also caused this type of auction for items whose price is difficult to circulate widely. Radio channel auctions in many countries still use its design methods. In 2017, the United States adopted the incentive auction model designed by two economists and successfully auctioned the 600MHz frequency band.
Incentive auctioning refers to an auction method that encourages existing spectrum holders to voluntarily assign rights to use spectrum through market means, and optimizes the allocation of spectrum resources by reprogramming and assigning frequencies. . Unlike previous frequency auctions, incentive auctions increase the organizational stage of frequency recovery by market-based means, and frequency holders waive the right to use the frequency on a voluntary basis. This provides new methods and ideas for managing spectrum resources.
According to the official Stanford University website, the auction mechanism designed by Paul Milgrom has been copied and modified numerous times and used in dozens of global auctions involving hundreds of billions of dollars in radio spectrum, electricity and natural gas. Additionally, Milgrom has also recommended Microsoft’s online auction sponsored search and Google’s initial public offering to auction shares.
Get into practice
“This year’s economics award winners started with basic theories and used their results in practical applications. These applications have spread around the world. Their findings are of great benefit to society,” said Fredeksen, chairman of the Nobel Prize Committee.
From the 2015 Angus Deaton Award for their research on consumption, poverty and well-being, to the three economists who last year won awards for “Experimental Practices to Alleviate Global Poverty,” to this year’s focus on auctions. In theory, the Nobel Prize in Economics attaches great importance to practice.
“This is the first Nobel Prize that clearly recognizes the growing empirical research in modern economics, and there may be more and more Nobel laureates in the future.” In 2015, Justin Wall, Professor of Economics and Public Policy at the University of Michigan Said Firth. But now, the trend of the Nobel Prize in economics “close to society” is increasingly evident.
In this award speech, the Nobel Prize Committee wrote: “Auctions are everywhere and affect our daily lives. People always sell things to the highest bidder or buy from the lowest bidder. Today. Every day, countless items. value changes hands at auctions. There are not only works of art and antiques, but also securities, minerals and energy. Public procurement can also be done through auctions. “
Fan Mingtai, a researcher at the Institute of Quantitative and Technical Economics of the Chinese Academy of Social Sciences, said that as a kind of market mechanism, the market mechanism in auction theory has its own uniqueness. From the perspective of economic research, auction theory is a relatively good and influential theory for improving the design of market mechanisms. In general, the winners of the Nobel Prize in Economics have made many developments and deductions after proposing the mechanism, the auction mechanism also has many developments and deductions after proposing it, and there are many quotes.
Fan Mingtai also mentioned that there are some differences between the auction market and the ordinary market, such as the position of buyers and sellers. The most classic example of the use of auction theory is the art transaction. Due to the asymmetry of information and low prices, auctions can be used to determine the price and discover its value. In addition to the art market, the emissions trading market will also apply to auction theories. For products that are difficult to price, the auction mechanism provides a negotiating mechanism and auction theory promotes the design and improvement of market mechanisms. Therefore, in practice, it also promotes new market mechanisms such as emissions trading and art trading and their improvement mechanisms.
Lou Feipeng, a researcher at the Postal Savings Bank of China, told Beijing Business Daily that the auctions are more closely related to game theory. In recent years, there has been a lot of research on auction mechanisms in academic circles, not only in game theory, but also in management engineering. Actually, there are many applications of auction theory. For example, banks use auction theory when disposing of bad assets.
Although he confessed that he had never participated in an auction, Wilson also said: “If you see an ad on a search engine, the ad space is usually sold in the form of an auction. Therefore, you can often run into it. the auction. By the way, my wife added that we bought ski boots on eBay, which were also obtained through auction. “
As for the two economists’ views on the auction theory, a reporter for the Beijing Business Daily also sent an interview request, but as of press time, no response has been received.
Beijing Business Daily Reporter Tao Feng Tang Yitian
