Paul Milgrom and Robert Wilson win the Nobel Prize in Economic Sciences for the Year 2020

Paul Milgrom and Robert Wilson win the Nobel Prize in Economic Sciences for the Year 2020

oyal Swedish Academy of Sciences announced on 12th October 2020 that this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel or famously known as the Nobel Prize in Economic Sciences will be awarded to the Stanford economists Paul Milgrom and Robert Wilson. They were awarded the 10 million Swedish Kronor (around ₹8.3 crores) prize for “improvements to the auction theory and inventions of new auction formats”. Their contributions played a major role in creating an efficient way to conduct auctions for goods and services that are difficult to sell in a traditional way, such as radio frequencies, mining rights, etc. Peter Fredriksson, the chair of the Prize Committee, lauded the laureates’ developments in the fundamental theory of auctions and commended on how their contributions proved in favor of the society.

What are auctions?

Auctions are setups where the sellers hold up their products, commonly a single product, or rights to ownership of certain commodity for sale and the buyers put up bids for this product or object that is to be auctioned off and the product is sold to the highest bidder based on the bids that are made on it. Examples of auctions ranges from common day phenomena like fresh fish wholesale market sale to high end sophisticated radio frequency or spectrum auctions held by governments or responsible authorities. As Paul Milgrom mentions in his essay about Auction Theory, the popularity of auctions can be attributed to the fact that auctions often lead to outcomes that are efficient and stable. He also mentions that the main feature of an auction is the “explicit comparison made among the bids” and based on this comparison the auctions can be characterized into 3 types. The ascending-bid auction is an auction where multiple bidders offer their bids and it begins from the lowest bid and escalates to the highest bid where there is no one to counter the offer made by the highest bidder. ,. Under the sealed-bid auction, the bids are made simultaneously amongst the bidders and seller can make a decision based on the offers he/she gets. And finally, the descending-bid auction deals with a system where the sellers put out “series of” price quotes for the sale object, which he/she lowers over time to find a suitable buyer. Each buyer has the option to buy it or not according the latest offer put out by the seller. 

The Laureates’ contributions

Paul Milgrom and Robert Wilson majorly studied the behavior of auctions and analyzed how individual bidder’s beliefs affected the nature of the auction being conducted. Their major contributions in Economics were the improvements to the Auction Theory and the development of an auction format that facilitated the auction of high-valued goods such as mining rights, radio frequencies etc. Auctioning of such goods whose future value to the buyer cannot be ascertained properly makes it difficult for the buyers to analyze the true value of the good that is being auctioned off. 
In the 1960s and 1970s, Wilson found that the bidders often end up overestimating the value of the good that is being auctioned off. . According to the theory framework set by Robert Wilson the bidders collectively hold the same value for the good that is auctioned or in Wilson’s words the bidders shared a “common value” regarding the good that is being auctioned off. Wilson addressed this problem in the auctions where the highest bidder purchases the good at a price possibly more than its actual worth. This problem in auctions where they pay more than the actual or future value is termed as the “Winner’s Curse”. The perils of Winner’s Curse do not stop at overvaluing the good but sometimes it also leads to undervaluing the good as well. To avoid the Winner’s curse, bidders may quote prices less than the actual value and can lead to undervaluing the good that is being auctioned off, ultimately reducing the benefits to the sellers from the auction and this becomes problematic especially when bidders have different private information about the good’s true value.

Around 1980s, Paul Milgrom introduced theories that covered not only the common value issues but also the problems that arise due the private values. Milgrom concluded that the English auctions or the ascending-bid auctions are better at avoiding the winner’s curse than the Dutch auctions. He says that this is because bidders gain more information about the good during an English auction due to the counter offers and bidders tend to leave after a certain price level. Milgrom also suggested that the quality and the returns of the auctions could be improved if the value of the good could be backed by certificates of authenticity, the valuation remarks of the good made by experts etc. Milgrom and Wilson conducted studies and founded a method by which the auctions could be conducted for highly-valued goods and services and through this method not only the buyer and seller gets the best out of the sale but these goods and services end up in the hands of rightful people who are able to use them and manage them properly as well. This auction format they developed is called Simultaneous Multiple Round Auction (SMRA). The history and auction process is explained as follows. 

During the 1990s, the United States Federal Communications Commission (FCC) decided to carry out the auction of radio frequencies to private entities and previously FCC dealt with the sale of radio frequencies through applications and lotteries and these methods became costly for the authorities due to the surge in usage of mobile phones that required the radio frequencies. Milgrom and Wilson invented SMRA auction format to address this problem. Under this system all biddable goods are offered simultaneously and bidders can bid on any portion of the items. The auction follows the path of an English auction where the bids start low and they go up to a point where there are no bids placed in a round. The first SMRA was conducted in 1994 and 10 licenses were sold over 47 rounds in that auction. The authorities were able to raise around $620 million.

Over time, other countries and institutions took up SMRA format for their auctions and this led to the invention of further new auction formats like the incentive auction, which were unique to the type of good that was auctioned off. 

About the Laureates

Paul Milgrom was born on April 20, 1948, in Detroit, Michigan, United States of America (USA). Milgrom did his graduation in Mathematics from University of Michigan in 1970 and his post graduation in Statistics in 1978 and PhD in Business in 1979 from Stanford University. He taught at Northwestern and Yale and is currently working at Stanford as the director of the Program on Market Design at Stanford Institute for Economic Policy Research. He is also the founding director of Stanford Institute for Theoretical Economics. 
Robert Wilson was born on May 16, 1937, in Geneva, Nebraska, USA. He got his bachelor’s in Mathematics degree, Master of Business Administration degree, and Doctor of Business Administration degree from Harvard University between 1959 and 1963.Wilson joined Stanford Graduate School of Business as a faculty member in 1964 and he was the director of Stanford’s Center on Negotiation in 1990 and also briefly headed Institute of Theoretical Economics from 1993 to 1995.
Written by, 
Paul Babu 
MS.c Economics
Indira Gandhi Institute of Development Studies (IGIDR), Mumbai


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