The 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Stanford University professors Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.” They will split the 10 million Swedish krona ($1.1 million) prize money.
The American duo study auctions, the centuries-old process of selling or procuring by taking bids, and developed new theories on the subject. “They have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies. Their discoveries have benefitted sellers, buyers and taxpayers around the world,” says the press release. The economist who established auction theory and devised sealed second-price auctions, William Vickrey, won the Nobel in 1996.
“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,” said Peter Fredriksson, chair of the Prize Committee.
“The prize to Wilson and to Milgrom gives just recognition to one of the most important and successful applications of economic theory: auctions and auction design,” said Stanford business school economist David Kreps. “But their influence on what we do and how we think in microeconomics, especially applied to the study of management, goes well beyond auctions. Their impact on business schools and business school curricula cannot be overestimated.”
Robert Wilson, 83, developed a framework to understand auctions of objects with a “common value.” When objects have a common value it means the value is ultimately the same for everyone, but bidders have different perceptions of the value based on different levels of information they possess during the auction. Examples include the future value of radio frequencies or the volume of minerals in a particular area. Wilson showed that rational bidders tend to place bids below their own best estimate of the common value because they are worried about the winner’s curse or a tendency for the winning bid to exceed the intrinsic value or true worth of an item.
Paul Milgrom, 72, analyzed auctions with both common and private values and was able to demonstrate that an auction will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding, like in an English auction, where the auctioneer starts with a low price and raises it, as opposed to a Dutch auction. He also showed that it’s in the seller’s interest to provide participants with as much information as possible about the object’s value before the bidding starts.
Perhaps the real world application Milgrom and Wilson are best known for together and separately is the original Federal Communication Commission spectrum auction design — the simultaneous ascending auction. This design has been used to allocate licenses worth more than $100 billion around the world. Milgrom has advised Microsoft Networks on sponsored search auctions, Google on its IPO auction of shares, Yahoo! on the design of an advertising marketplace, the Oregon Public Utilities Commission on sales of generating assets, Mexico on privatization auctions of state-owned assets, and various spectrum regulators in the U.S., UK, Canada, Australia, Germany, and Mexico. Wilson has advised the U.S. Department of the Interior and oil companies, the Electric Power Research Institute, and the Xerox Palo Alto Research Center on pricing strategy.