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The award Nobel Prize in Economics 2020 was awarded to American economists Paul R. Milgrom, 72 anni, and Robert B. Wilson, 83 years old, both professors from Stanford University, California. The prestigious award was awarded to him for his studies on the theory of market auctions. In particular, innovative work was used in the allocation of telecommunication frequencies. They are awarded the ‘Alfred Nobel Memorial Bank of Sweden Prize in Economics’ for ‘improving auction theory and inventing new auction formats,’ said the Swedish Academy jury. In general, they studied the behavior of operators in the auction markets.
The Nobel Prize for “auction theory”: the reasons
Motivation explains: «The weeks influence our daily life and this year’s winners in economics have improved it auction theory and invented new auction formats for the benefit of sellers, buyers and taxpayers around the world. ” Wilson’s studies showed “why rational bidders tend to bid below their best estimate of common value: they are concerned about the winner’s curse of overpaying and losing.” The prize awarded to the two teachers is SEK 10 million ($ 1.14 million), half each.
All up for auction
The heart of Wilson and Milgrom’s work is explaining the mechanisms underlying auctions, from the point of view of the seller and the bidders. Auctions have always existed, since ancient Rome. And today they regulate much of our lives, from Internet purchases to the price we pay for electricity, mobile phone rates – which depend on how much telecommunications operators have paid to gain a spectrum of frequencies – the cost of collecting the garbage (which the local company was awarded in a public tender, which is nothing more than an auction). Even the cost of public debt is linked to an auction, since BTPs are placed on the market to the highest bidder.
Wilson and Milgrom found that the outcome of an auction (or tender) depends on three factors. First, of the auction rules, if the bids are opened in a sealed envelope, if more bids can be made, on the price that the winner (the first or the raise) will have to pay. The second factor relates to the item sold at auction: does it have a different value for each bidder, or is it rated the same by everyone? The third factor is related to uncertainty. What information do the different bidders have about the value of the object? Using auction theory, it is possible to explain how these three factors influence the bidder’s strategy but also the behavior of those who offer an asset, to obtain the highest possible price. It’s not just theory: the two economists applied the concepts to develop new tailored auction formats, for example for the allocation of mobile phone frequencies.
