US economists win Nobel for contribution to auction theory
US academics Paul Milgrom and Robert Wilson won the Nobel Prize for Economics on Monday for work on auctions hailed as benefiting buyers and sellers of everything, from fishing quotas to aircraft landing slots.
Among the insights of the two Stanford University economists is an explanation of how bidders seek to avoid the so-called “winner’s curse” of overpaying, and what happens when bidders gain a better understanding of their rivals’ sense of value.
“Auctions are everywhere and affect our everyday lives. This year’s Economic Sciences Laureates, Paul Milgrom and Robert Wilson, have improved auction theory and invented new auction formats, benefiting sellers, buyers and taxpayers around the world,” the Nobel Prize’s official website tweeted.
Milgrom told Reuters from his home that Wilson, who lives just 50 metres away, came to knock on his door in California’s pre-dawn hours to tell him of their shared award because his phone had been on silent mode so he could sleep.
Milgrom and Wilson notably came up with formats for selling interrelated items simultaneously. In 1994, US authorities used one of their auction designs to sell radio frequencies to telecom operators, a move since copied in other countries.
Wilson showed that rational bidders tend to place bids below their own best estimate of what he called the “common value” that is, when the value of an item is deemed to be the same for everyone - for fear of paying too much. Milgrom complemented that with theories on “private values”, when the perceived value of something differs from bidder to bidder.
He demonstrated that an auction format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during the bidding process.