China Daily Global Edition (USA)
US economists win Nobel prize for improvements of auction theory
The 2020 Nobel Prize in economic sciences has been awarded to Paul R Milgrom and Robert B Wilson, both of them professors at Stanford University, “for improvements to auction theory and inventions of new auction formats”.
The two economists from the United States have studied how auctions work and their theoretical discoveries have improved the auctions in practice.
The prize committee said: “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.”
Wilson investigated auctions with a common value, a value which is unknown beforehand, but is the same for all bidders in the end.
Consider an auction for fishing rights, where different bidders compete for fishing quota. The value of the fishing quota is not only determined by the volume but also the price of the fish. But this price is unknown when the bidder placed their bids, so they must estimate the common value of the auction and the most optimistic bidder may therefore overestimate the value and overpay for the object, the committee said.
The committee said this is something known as the winner’s curse, which means bidders worry about paying too much and losing out.
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 analyzed 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.
New auction formats have been used for various items such as radio spectra, fishing quotas, aircraft landing slots and emissions allowances, the committee noted.
The committee said: “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. In 1994, the US authorities first used one of their auction formats to sell radio frequencies to telecom operators. Since then, many other countries have followed suit”.
Peter Fredriksson, chair of the prize committee, said: “This year’s (Nobel) laureates in economic sciences started out with fundamental theory and later used their results in practical applications, which have spread globally.”
Speaking over the phone to reporters in Stockholm, Wilson said he was “very happy about the news” but has not given any thought on how to spend the 10-million-Swedish crown ($1.13 million) prize money shared between the laureates.
The Nobel prize in economic sciences was the last of the Nobel awards to be announced this year. Last week, laureates were announced for medicine, physics, chemistry and literature.