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Nobel Memorial Prize in Economic Sciences for Paul Milgrom and Robert Wilson

13.10.2020

On Monday October 12, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Paul Milgrom and Robert Wilson (both at Stanford University). They received the prize for improvements to auction theory and inventions of new auction formats. 

Text by Univ.-Prof. Dr. Maarten Janssen, Professor of Microeconomics

Auctions are nowadays used in many parts of our society. Online market places like eBay use auctions, but firms are also bidding for advertising space on websites. Other important applications include electricity auctions, auctions of radio frequencies for mobile communications, oil drilling rights or government bonds. Bob Wilson developed the notion of the winner’s curse. In auctions for the right to drill for oil, for example, bidders have a common, uncertain value. Each bidder will make a private assessment on what the oil field is worth, with some of the bidders getting a too optimistic assessment, while others get a more pessimistic assessment. In auctions where the highest bidder wins and bidders with higher values bid more, winning the auction may be bad news as knowing you were the highest bidder reveals you had the most optimistic value, which in hindsight may be too optimistic.

Together with Bob Wilson, Paul Milgrom recognized that in many of the above mentioned fields, bidders are interested in multiple items, and not just in a single item. They developed an auction format, the simultaneous multi-round auction (SMRA), that allows a seller to sell multiple items at once and allows bidders to express bids for multiple objects. With multiple objects, special care has to be taken of auction rules that specify how bidders can switch between objects and when the auction comes to an end. The SMRA has been first used in 1994 by the FCC to allocate spectrum rights to mobile telephony companies in the USA. The auction format has subsequently been also widely used in many countries around the world, including Austria. In all these applications, some shortcomings came to the forefront. In particular, it is known that the SMRA format may lead to inefficient outcomes if bidders’ value multiple objects together more than the sum of the individual components. Also, tacit collusion is possible if all bidders can foresee there is an auction outcome that naturally arises when all bidders compete with each other. This has lead Paul Milgrom and others to develop other formats that may overcome these problems. 

Auction design is now an important area in economic research and it has many real world applications. In 2016 the University of Vienna has organized a workshop in this area where Paul Milgrom and many other scholars were participating. For more details of the workshop, see auctions2016.univie.ac.at/program. It is also worth mentioning that the research of one of our recent graduate students, Bernhard Kasberger, has been cited by the Nobel Prize committee in its explanation of their decision to award the Prize to the two 2020 laureates.

© Nobel Media. III. Niklas Elmehed.