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Nobel Prize 2020 in Economics: What are 'improved auctions' practices

Chitranjan Kumar     October 12, 2020

The Nobel Prize 2020 in Economic Sciences has been awarded to American economists Paul R. Milgrom and Robert B. Wilson for their contributions to auction theory and inventions of new auction formats, the Royal Swedish Academy of Sciences said on Monday. The economists, professors at Stanford University (USA), studied how auctions work and used theory to understand the outcomes of different rules for bidding and final prices, the auction format.

As per press statement issued by the Royal Swedish Academy of Sciences, the economists have 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, it said.

The prize amount of 10 million Swedish kronor, the official currency of Sweden, will be shared equally between the two laureates.

"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," says Peter Fredriksson, chair of the Prize Committee.

In 2019, the economics prize was awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer for their work to alleviate global poverty.

What is Auction theory?

Auction theory is an applied branch of economics which studies how people act in auction markets and researches the properties of auction markets. People have always sold things to the highest bidder, or bought them from whoever makes the cheapest offer. Nowadays, objects worth astronomical sums of money change hands every day in auctions, not only household objects, art and antiquities, but also securities, minerals and energy. Public procurements are also conducted as auctions.

Using auction theory, researchers try to understand the outcomes of different rules for bidding and final prices, the auction format. The analysis is difficult, because bidders behave strategically, based on the available information. They take into consideration both what they know themselves and what they believe other bidders to know.

Contribution of Robert B. Wilson

Robert Wilson, 83, an American economist and the Adams Distinguished Professor of Management, Emeritus at Stanford University, developed the theory for auctions of objects with a common value - a value which is uncertain beforehand but, in the end, is the same for everyone. Examples include the future value of radio frequencies or the volume of minerals in a particular area. Wilson 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.

Role of Paul R. Milgrom

Paul Milgrom, 72, the Shirley and Leonard Ely Professor of Humanities and Sciences at Stanford University, formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder. He analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other's estimated values during bidding.

Officially known as the Sveriges Riksbank Prize in Economic Sciences, the prize for economics was established by Sweden's central bank and has been awarded since 1969 in memory of industrialist Alfred Nobel.

Also Read: Paul R Milgrom, Robert B Wilson win Nobel Prize for Economics 2020

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