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The 2020 Nobel Prize in Economics was awarded to Paul R. Milgrom and Robert B. Wilson “for their studies on auction theory and the invention of new auction formats.” The important prize is not technically a Nobel like any other, but a prize from the Bank of Sweden for economics in memory of Alfred Nobel.
Milgrom and Wilson have devoted much of their studies to the analysis of the operating mechanisms of the bars. Based on their findings and experiences, they have also developed new auction formats, both for goods and services that are often difficult to sell in the traditional way. According to the committee that awarded the award, their discoveries have generated benefits not only for sellers and buyers, but also for taxpayers in many areas of the world thanks to better systems for states to auction certain goods. , such as radio frequencies used in telecommunications.
In general, we tend to sell things to those who bid us higher to get them, just as we buy them to those who tend to offer them at the cheapest price. Auction trading has become a major factor in today’s economy, with large amounts of money being exchanged every day and not just for goods like antiques, art, and houses. Raw materials of various kinds are sold at auctions and governments themselves buy through auctions.
The “auction theory” is used precisely to assess how, depending on the rules decided for auctions, there are variations in the methods of bidding and in what determines the final selling price. It is not an easy job: in an auction the bidders adopt numerous strategies, not always rational, to try to obtain the best result without spending too much, and many times it depends on the amount of information they have access to and what they imagine that the other bidders know. against those who compete.
Over the course of his academic career, Wilson has developed a theory for the auction of objects with a “common value”, that is, with a value that is initially not clear to the bidders, but that in the end turns out to be the same for all . In the case of radio frequencies, which are usually authorized by governments to allow operators to use them to provide their services, something similar happens. Bidders at an early stage tend to bid below their own estimate of the common value of that good, because according to the theory they fear “the winner’s curse”, that is, the possibility of obtaining the good they want, but paying for it . however more than its common value.
Instead, Milgrom has worked on more generalized auction theories, also introducing the concept of “private value” in addition to the common one, and which therefore can vary from one bidder to another. It demonstrated how in various auction formats the seller can expect higher than expected returns if bidders have the opportunity to find out more about the value that their competitors place on the auctioned property.
Based on these analyzes, Wilson and Milgrom have developed new auction formats, including, for example, the ability for a seller to launch an auction to drive positive business outcomes rather than maximize the revenue from their sale. One of these techniques was used by the United States government in 1994 to auction some radio frequencies for telecommunications operators. In subsequent years, several other countries would use the same format for similar purposes.
Paul R. Milgrom was born in 1948 in Detroit, United States, and is Professor of Human Sciences at Stanford University.
Robert B. Wilson She was born in 1937 in Geneva, United States, and is a professor of Management at Stanford University.
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