Stanford pair win Nobel Prize in economics for auction work
STOCKHOLM — Auctions are everywhere in today’s economy. They determine how Google sells ads, what price consumers end up paying for electricity, and the way governments sell off the public airwaves to telecom companies and broadcasters.
For helping make auctions run more efficiently, two Americans on Monday won the Nobel Memorial Prize in Economic Sciences.
The discoveries of Paul Milgrom and Robert Wilson, both of Stanford University, “have benefited sellers, buyers and taxpayers around the world,” the Nobel committee said.
The two tackled the tricky problem of making auctions work efficiently. The committee said Wilson’s work showed “why rational bidders tend to place bids below their own best estimate of the common value” — which could mean the item goes for less than it’s worth and perhaps not to the buyer who most wants it, neither of which is supposed to happen if the auction is working properly.
The winners’ work provides guidance about “how to price and allocate scarce goods — radio spectrum, electricity, financial securities, and many more,” said economist Peter Cramton, a former student of Wilson’s now at the University of Maryland and the University of Cologne in Germany.
The effects of their work can be seen all around.
“Online advertising is sold at auction,” said David Warsh, who tracks economic research at his blog Economic Principals. “That Google was able to adopt the method so quickly and seamlessly depended entirely on theory developed by Milgrom and his competitors and their students.”
The work is about more than money. Some governments, for example, auction off the right to pollute in hopes of reducing emissions; cleaner companies can resell unneeded rights to dirtier ones, creating a financial incentive for companies to make their operations greener. “The objective is not always to maximize the revenue for the seller but also can have a societal objective,” said Nobel Committee member Ingrid Werner.
One problem in auctions is the so-called winner’s curse. If buyers are vying to purchase, say, fishing rights, they have to make bids without knowing what the price of fish will be in the future. They run the risk of winning the auction only by overpaying. To compensate, they tend to shave their bids.
A solution, according to the research by Wilson and Milgrom, is for the seller to provide as much information as possible before the bidding begins, perhaps providing an independent appraisal of the item being sold. Solving the problem doesn’t just help the seller get a better price; it helps make sure the item being auctioned goes to the bidder likely to make the most efficient use of it — a key goal of economic policy.
Their research has had a big impact on the telecommunications industry, where private companies seek government licenses to use publicly owned radio frequencies for everything from mobile phone calls to internet payments.
Before the 1990s, the U.S. government essentially conducted “beauty contests” to hand out the frequencies, letting companies make their case for getting the licenses. The approach encouraged aggressive lobbying but didn’t raise much money for the Treasury.
In 1994, the U.S. government turned to auctions. Milgrom, 72, and Wilson, 83, (with help from Preston McAfee, now at Google) designed an auction format in which all the licenses were sold in one go.
The auction raised $617 million. The format has also been used to auction off electricity and natural gas
Wilson said that, given the coronavirus pandemic, he had no immediate plans for what to do with his share of the $1.1 million cash prize that comes with the award, along with a gold medal.
“Probably I’ll just save it for my wife, my children,” he said.