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Auctions have been a part of our economies since the time of Babylon, at least. But it’s not until the last few decades that researchers have begun to understand the forces that are really at play when people bid competitively for a product.
What role does the auction format play? What happens during the tender? What determines the final price? And how do you organize a “good” auction?
This year’s economics laureates, Stanford professors and auction theorists Paul Milgrom and Robert Wilson, have cracked various riddles and helped solve tangled problems in modern economics.
This has been done, among other things, with the help of game theory and sophisticated basic mathematical research. Since then, the same researchers have been very firmly involved in the design of new forms of auction.
This same combination of advanced academic theory and concrete engineering is unusual and sought after by the awards committee. Especially in the digital world, your auctions have played an important role.
Milgrom and Wilson differ in their models between “private” and “common” values in an auction.
Selling a villa is a good example. Each speculator has a personal valuation of the house, which depends on individual taste and needs. But a potential buyer is also trying to estimate the “common” value of the villa. Which is roughly equivalent to market value.
Most people who have bought a home recognize the dilemma. How much is the item worth to me? And what is it worth to others if I try to sell the house in a year? The tension between the two poles is critical in many auctions.
Open bidding can help speculators find a “true” home valuation. This is one of the ideas that Paul Milgrom has shown theoretically.
But after a bid, a phenomenon also arises that many will surely recognize: the winner’s curse. The highest bidder wins, but is also the one with the highest valuation. No one else thought the house was worth that much. Raise the suspicion that you have paid too much.
It was like this phenomena that Milgrom and Wilson separated, analyzed, and constructed in different models beginning in the 1960s.
Professor Tommy Andersson, a member of the pricing committee and an expert on market design, describes it as an “acute situation” for auction theories in the 1990s.
It was then that the Internet and mobile telephony began to make their way. The US authorities discovered that their old model for allocating space in the air was not working. The solution was what was called “the largest auction in history”: the sale of radio spectrum space to the media and telecommunications companies to the highest bidder.
The same design was Global standard. And now, the Wilson and Milgrom auction formats are used everywhere in the economy, from emissions trading to the ads we see online. Spectrum auctions alone attract hundreds of billions to states around the world.
How do you organize a “good” auction?
In November, the Swedish state will hold a spectrum auction that will lay the foundation for Sweden’s 5G network. The problem has many dimensions. Licenses cannot be accidentally removed, it would be a waste of taxpayers money. But the state shouldn’t bankrupt businesses either because it can hurt consumers. We also want a good 5G network. Therefore, the objective is reasonably high prices, in a flexible and fair market.
Paul Milgrom has helped the Swedish Post and Telecommunications Agency with the arrangement.
Read more:
Milgrom and Wilson receive Alfred Nobel Memorial Prize in Economics
“There is no limit to the use of the theories of the laureates”
