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  • Raghav Sand

Nobel Prize 2020: Economics

The Nobel for Economic Sciences 2020 is being awarded to Paul Milgrom and Robert Wilson. They have studied how auctions work. The duo has helped to formulate new ways to sell products and services which were not easily sold by traditional methods. Their best-known contribution is designing sale of radio frequencies to telecom operators by U.S. authorities for the first time.

In 1968, Sveriges Riksbank (Sweden’s central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize.

Know the Winners

Paul Milgrom analysed 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.

Paul Milgrom and Robert Wilson were awarded with the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.(Photo credit: Twitter/@Stanford)
Robert Wilson (L) and Paul Milgrom (R)

Robert Wilson developed the theory for auctions of objects with a common value. Bidders may quote an amount for minerals, and at a later stage the value will be indistinguishable for everyone i.e. a value which is uncertain beforehand but, in the end, is the same for everyone. He showed why rational bidders tend to place bids below their own best estimate of the common value. The logic behind this stance is that they are worried about the winner’s curse – that is, about paying too much and losing out.

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Types of Auctions

English Auction is the most common methodology used worldwide. Here, the auctioneer begins with a low price. Participants can see all the bids and choose whether they want to place a higher one. The highest bidder takes home the prize. A Dutch auction starts with a high price, which is then gradually lowered until the object is sold.

It is in seller’s interest to provide information to bidding participants about the object’s value prior to the bidding. For example, the seller of a house can expect a higher final price if the bidders have access to an (independent) expert valuation before bidding starts.

Developing SMRA

Milgrom and Wilson – partly with Preston McAfee – invented Simultaneous Multi Round Auction (SMRA). It allows bidders to bid on multiple objects simultaneously and win multiple objects. The auction proceeds in rounds, which are specific periods of time in which all bidders can submit bids. The bidding continues until no bidder is willing to raise the bid on any item further.

SMRA uses simple activity rules, which force bidders to be active from the start. In the absence of such rules, bidders might be tempted to hide their demand and wait to see how prices develop before they start bidding. Activity rules can be considered to be a major innovation of this auction format.

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