Two American economists, Paul R. Milgrom and Robert B. Wilson, were awarded the Nobel Prize in Economics on Monday for improvements in auction theory and inventing new auction formats – innovations that have found great practical application in the allocation of scarce resources.
The couple, close associates both of whom have ties to Stanford University, pioneered the new auction formats that governments have been using to auction radio frequencies ever since.
The economists “started with fundamental theory and later used its findings in practical applications that have spread around the world,”
Auctions help sell a wide variety of products, including art, minerals, and online advertising. They can also take on different characteristics: objects can have a common value for all bidders (like goods like oil) or private values that vary between bidders (like art). Bidders may know exactly the value of the property or they may have incomplete information. Commandments can be open, meaning anyone can see them, or closed.
Mr. Wilson “was the first to framed” auctions of items of common value, according to the award committee. In his paper, he explained that bidders will offer less than they think the property or service is worth because they are afraid of paying too much – the winner’s curse – even more acute when they are at an information disadvantage.
The 2020 Nobel Prizes
Updated October 12, 2020
However, in most auctions, bidders have both common and private values. When buying a house, for example, buyers think about what they personally like about the amenities and what the market value of the house could be.
Mr. Milgrom developed a theory to deal with this mixture of common and private value, and he examined how the “winner’s curse” works in such cases. He found that people at what are called English auctions, where prices start low and go up, undercutting less than they do at Dutch auctions, where they start high and go down.
However, the couple’s “best-known contribution”, according to the committee, is their work developing new auction formats for complex situations, including the format that governments are now using to allocate radio frequencies to telecom operators.
The radio bandwidth was once allocated through “beauty pageants,” where operators explained why they should be given it – resulting in intense lobbying. In the 1990s, the Federal Communications Commission pushed for lottery-based bandwidth allocation, and Congress allowed it. Initially, however, the new approach also worked poorly: the lotteries were held on site, which among other things led to network disruptions for national operators.
Milgrom and Wilson developed a new format that allowed the many geographic areas of the radio spectrum to be auctioned simultaneously across different bidders, starting with low prices and repeated bids. The FCC adopted the approach in 1994 and found that it could dump the radio room and raise a lot more money at the same time.
So successful was Milgrom and Wilson’s approach that many other countries, including the UK, Canada and Spain, continued to adopt it.
Who are the winners?
Mr. Milgrom was born in Detroit in 1948. He was educated at Stanford University, where he received his PhD in 1979 and is now a professor.
Mr. Wilson was born in Geneva, Neb., In 1937, studied at Harvard University and is now Professor Emeritus at Stanford University.
Who won the business award last year?
Abhijit Banerjee and Esther Duflo, both from MIT, and Michael Kremer from Harvard have been honored for more than 20 years of economic research to develop new ways to study and help the world’s poor. Read more about it here.
Who are the other Nobel Prize winners this year?
The Nobel Prize in Physiology or Medicine, announced in Sweden on Monday, was awarded to three scientists for their work in discovering the hepatitis C virus. Read more about the winners Harvey J. Alter, Michael Houghton and Charles M. Rice.
Half of the Nobel Prize in Physics announced in Sweden on Tuesday was awarded to Roger Penrose, who showed how black holes can form, and the other half went to Reinhard Genzel and Andrea Ghez to discover a supermassive object at the center of the Milky Way. Read more about the winners.
The Nobel Prize in Chemistry was announced in Sweden on Wednesday. Read more about the winners Emmanuelle Charpentier and Jennifer A. Doudna, who developed the Crispr tool, with which the DNA of animals, plants and microorganisms can be modified with high precision.
The Nobel Prize in Literature was announced in Sweden on Thursday. Read more about recipient Louise Glück, one of America’s most famous poets.
The World Food Program, a United Nations agency, was awarded the Nobel Peace Prize on Friday for its efforts to fight hunger around the world and lay the foundations for peace in war-torn countries. The organization has been recognized for its work during a coronavirus pandemic that “contributed to a sharp increase in the number of people suffering from hunger in the world”.