Stockholm – Two American economists received the Nobel Prize on Monday for improving the way auctions work. This research underlies much of today’s economy, from the way Google sells advertising to the way telecommunications companies receive radio waves from the government.
The discoveries of Paul R. Milgrom and Robert B. Wilson, both of Stanford University, “have helped sellers, buyers and taxpayers around the world,” said the Nobel Committee.
Wilson was once Milgrom’s Ph.D. Consultants, and they’re neighbors too. Milgrom, who was reached by phone at his California home, said he had “strangely”
“I knocked on my door from Bob Wilson,” he told The Associated Press when it was still the middle of the night.
Milgrom, 72, said students, friends, and colleagues have long suggested that he and Wilson, 83, might be due for the award.
“It’s nice to have their respect, but also their affection,” said Milgrom.
The two men 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 common value” – which could mean the item costs less than it’s worth and maybe not to the buyer, who wants him most, nor should it happen if the auction works properly.
The effects of their work can be seen everywhere. “Online advertising is auctioned,” said David Warsh, who follows economic research on his blog Economic Principals. “The fact that Google could apply the method so quickly and seamlessly depended entirely on the theory that Milgrom and his competitors and their students had developed.”
There is more to work than money. For example, some governments are auctioning off the right to pollution in hopes of reducing emissions. Cleaner companies can resell unneeded rights to dirtier ones, creating a financial incentive for companies to do their business more environmentally friendly. “The goal is not always to maximize income for the seller, but can also have a social goal,” said Ingrid Werner, member of the Nobel Committee.
One problem for sellers at auctions is the so-called winning curse. For example, if buyers want to acquire fishing rights, they have to bid without knowing what the price of fish will be in the future. They begin to worry that the only way to get their way is through overpayment, and they can respond by reducing their offers.
Research by Wilson and Milgrom has shown that the seller provides as much information as possible prior to bidding in order to potentially provide an independent assessment of the item being sold.
They also tackled the “snake in the grass strategy,” said Wilson. This involves a company keeping its interest in the item sold secret for most of the auction and then submitting the winning bid at the last minute.
“It’s like cutting off an eBay auction,” Wilson told the AP, adding that they had drafted rules that would force bidders to show their interest sooner.
Her research has had a major impact on the telecommunications industry, where private companies apply to the government for licenses to use publicly owned radio frequencies for everything from cell phone calls to internet payments.
Prior to the 1990s, the US government essentially ran “beauty pageants” to distribute the frequencies and had companies campaign for the licenses. The approach encouraged aggressive lobbying, but didn’t raise much money for the Treasury Department.
In 1994 the US government turned to auctions. Milgrom and Wilson (with the help of Preston McAfee, now at Google) designed an auction format in which all licenses were sold at once. This format prevents speculators from buying up frequencies in a certain geographic area and then reselling them to large telecommunications companies wishing to join national or regional networks.
The auction raised $ 617 million – sales of spectrum previously spent for next to nothing – and became a model for countries from Canada to India. The format was also used to auction electricity and natural gas.
Wilson said he thought his time to win a Nobel Prize for work was over.
Wilson spoke to reporters in Stockholm by phone after learning of his victory and tried to think of an auction in which he himself had participated. Then he added, “My wife advises me that we bought ski boots on eBay.”
Wilson described Milgrom, who developed a more general theory of auctions, as “some kind of genius behind all of this auction work”.
The Americans played a prominent role among this year’s Nobel Prize winners. Apart from the Peace Prize, which went to the United Nations World Food Program, seven of the eleven winners were American.
Goran Hansson, general secretary of the Royal Swedish Academy of Sciences who announced the award, said it reflected American investment in research after World War II. “And we’ll see how that trend can change,” he added.
Wilson said that in the face of the coronavirus pandemic, he had no immediate plans of what to do with his share of the award-associated cash prize of 10 million crowns ($ 1.1 million) and a gold medal.
“I will probably just keep it for my wife, my children,” he said.
Last year’s award went to two researchers from the Massachusetts Institute of Technology and a third from Harvard University for their groundbreaking research on efforts to reduce global poverty.
Few economists could have predicted last fall that the globe would practically come to a standstill within months as governments closed their borders, imposed lockdowns and ordered other measures to stop the spread of COVID-19 from happening around the world led to a sharp decline in business.
The prestigious award comes with a cash prize of 10 million crowns ($ 1.1 million) and a gold medal.
On Monday the Nobel Committee awarded theto discover the liver-damaging hepatitis C virus. Tuesday Honored Breakthroughs in Understanding the Mysteries of the Cosmic Black Holes and the On Wednesday, scientists went behind a powerful gene editing tool.
Thewas awarded on Thursday to the American poet Louise Glück for her “open and uncompromising” work. The World Food Program won the on Friday for his efforts to fight hunger worldwide.