American economists Paul R. Milgrom and Robert B. Wilson have been awarded the 2020 Nobel Prize in economics for their contributions to auction theory, the Royal Swedish Academy of Sciences announced today.
Milgrom and Wilson, who are both professors at Stanford University in California, were recognized for theoretical discoveries that improved how auctions work. According to the Royal Swedish Academy of Sciences, they also designed auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies.
“This year’s Laureates in Economic Sciences started out with fundamental theory and later used their results in practical applications, which have spread globally. Their discoveries are of great benefit to society,” Peter Fredriksson, chairperson of the prize committee, said in a statement. The discoveries of Paul R. Milgrom and Robert B. Wilson “have benefited sellers, buyers and taxpayers around the world,” the Nobel committee said.
According to the Royal Swedish Academy of Sciences, they invented new formats for auctioning many interrelated objects on behalf of a seller motivated by doing good for society rather than simply achieving the highest price possible. This has revolutionized the telecom industry. In 1994, US authorities had used one of their formats to sell bands of radio spectrum. Doing so has ensured taxpayers were benefiting from the sale of radio frequencies that were owned by the government but of enormous value to mobile network operators.
Last year, nobel prize was awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer for their work to alleviate global poverty. Duflo, a professor at the Massachusetts Institute of Technology, was the youngest person and only the second woman to be awarded the prize.
The nobel prize for economics is officially called the Sveriges Riksbank Prize in Economic Sciences. It was established by Sweden’s central bank and has been awarded since 1969 in memory of industrialist Alfred Nobel. The Sveriges Riksbank Prize in Economic Sciences has been awarded 51 times to 84 Laureates since inception.
Robert B. Wilson was born 1937 in Geneva, USA. He did his D.B.A. 1963 from Harvard University, Cambridge, USA. Adams Distinguished Professor of Management, Emeritus, Stanford University, USA. He showed why rational bidders tend to place bids below their own best estimate of the common value: they are worried about the winner’s curse – that is, about paying too much and losing out.
Paul R. Milgrom was born 1948 in Detroit, USA. He completed his Ph.D. 1979 from Stanford University, Stanford, USA. Shirley and Leonard Ely Jr. Professor of Humanities and Sciences from Stanford University, USA. He formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder.
Both Wilson and Milgrom have clarified how auctions work and why bidders behave in a certain way. Not only this, they have also used their theoretical discoveries to invent entirely new auction formats for the sale of goods and services.
A little about the ‘Auction Theory’
The outcome of an auction (or procurement) depends on three factors — the first is the auction’s rules, or format. Are the bids open or closed? How many times can participants bid in the auction? What price does the winner pay – their own bid or the second-highest bid? The second factor relates to the auctioned object. Does it have a different value for each bidder, or do they value the object in the same way? The third factor concerns uncertainty. What information do different bidders have about the object’s value?
Using auction theory, it is possible to explain how these three factors govern the bidders’ strategic behaviour and thus the auction’s outcome. The theory can also show how to design an auction to create as much value as possible. Both tasks are particularly difficult when multiple related objects are auctioned off at the same time. Thus, this year’s Laureates in Economic Sciences have made auction theory more applicable in practice. This was possible through the creation of new, bespoke auction formats.
