Nobel Prize in Economics awarded to a duo for their work on auction theory

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Paul Milgrom and Robert Wilson, professors at Stanford University, won this year’s Nobel Prize in Economics for their work on auction theory and the design of new auction formats.

The committee that awarded the prize – officially known as the Sveriges Riksbank Prize in Economics in Memory of Alfred Nobel – said the theory they developed had contributed to the development of new, complex auction formats now. used worldwide, for purposes ranging from the sale of radio spectrum to the allocation of landing slots at airports and the establishment of emissions trading systems.

Auction results matter – to taxpayers as well as to private buyers and sellers – as they influence many aspects of daily life, from electricity prices to cell phone coverage and garbage collection.

However, it is difficult to understand how different auction formats will influence the results, as bidders behave based on the information they have, but also based on what they think other bidders know.

The award committee said the two winners used their knowledge to design new auction formats for goods and services that can be difficult to sell in the traditional way, with some formats being better suited to help a seller maximize their revenue. , and others where the goal is to achieve a broader social benefit.

Mr. Wilson, born in Nebraska in 1937, developed a theory of the auction of objects of common value, uncertain beforehand, but the same for everyone. He showed why rational bidders tended to place bids below their own best estimate of common value: because they worried about the “winner’s curse” of overpaying and losing, the committee.

Mr. Milgrom, born in Detroit in 1948, formulated a more general auction theory that allowed for the calculation of both common values ​​and private values ​​that vary from bidder to bidder – for example, when a house has some resale value, but is more suitable for some buyers. that others.

This showed that the seller would realize a higher price if the auction was conducted in a way that allowed bidders to know more about each other’s estimated values ​​during the process.

One of the pair’s best-known contributions was their joint work to design the process for the first US auction of radio frequencies to telecom operators in the early 1990s. It was a challenge as operators failed. did not know how much the license for one geographic area was worth to them until the licenses for all areas were assigned.

Mr Milgrom and Mr Wilson invented a new format known as simultaneous multiple-round auctions, which involved offering licenses for all geographies simultaneously, starting with low prices and allowing repeat auctions – a format used by many other countries over the following decades.

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