Auction Theory: The 2020 Nobel Prize Winner

A little about Nobel Prizes

The Nobel Prize is not a single prize, but 5 different prizes in the fields of Physics, Chemistry, Physiology/Medicine, Literature and Peace. It is widely regarded as the most prestigious award in one’s respective field. The man behind the Nobel Prizes is Alfred Nobel, a Swedish Engineer, Businessman and Philanthropist. He held 355 patents, dynamite being the most famous and the element Nobelium is named after him. According to his 1895 will, the Nobel Prizes are awarded “to those who, during the preceding year, have conferred the greatest benefit to humankind”. Each laureate receives a gold medal, a diploma and a monetary prize of around $935k. It is held during December every year in Sweden and Norway.

A 6th Prize, known as the Nobel Prize in Economic Sciences was established in 1968, but it is considered as the Nobel Memorial Prize.

Nobel Prize in Economic Sciences 2020

This year, the Nobel Prize recipients were Paul Milgrom and Robert Wilson, both professors at Stanford University, for their work in improving the auction theory and creating new auction formats for goods and services that are difficult to sell in a traditional way, radio frequencies for example. According to the Nobel Press release, their discoveries have benefitted sellers, buyers and taxpayers around the world. They have received a prize of 10 million Swedish Kronor ( US $1.1 million).

What is the Auction Theory?

In simple terms, the auction theory is a branch of applied economics that deals with people’s behavior in an auction market while researching it’s properties. Using auction theory, researchers try to understand the outcomes of different rules for bidding and final prices, the auction format. The analysis is difficult, as bidders behave strategically, taking into consideration what they know and what they assume other bidders to know, based on the available information.

What did the Laureates do?

Robert Wilson developed the theory for auctions of objects with a common value, which is uncertain beforehand but, in the end, is the same for everyone. The future value of radio frequencies or the volume of minerals in a particular area are some examples. He showed that the worry of the winner’s curse (about paying too much and losing out) caused the rational bidders to place bids below their own best estimate of the common value.

Moreover, Paul Milgrom formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder. He analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding.

Over time, societies have allocated ever more complex objects among users, such as landing slots and radio frequencies. In response, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue.

Sources

  1. The New York Times. “2020 Nobel Prize Winners: Full List.” The New York Times, The New York Times, 5 Oct. 2020, www.nytimes.com/article/2020-nobel-prize-winners.html?auth=login-google.
  2.  “The Prize in Economic Sciences 2020.” The Nobel Prize , 12 Oct. 2020, www.nobelprize.org/uploads/2020/09/press-economicsciences2020.pdf .

 Rolander, Niclas. “Stanford Economists Win Nobel Prize for Research on Auctions.” BloombergQuint, Bloomberg Quint, 13 Oct. 2020, www.bloombergquint.com/global-economics/milgrom-wilson-win-2020-nobel-prize-in-economics

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