Stanford Economists Win Nobel Prize for Research on Auctions

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  • Bloomberg QuickTake: Now published this video item, entitled “Stanford Economists Win Nobel Prize for Research on Auctions” – below is their description.

    Two American economists won the Nobel Prize on Monday for improving how auctions work, research that underlies much of today’s economy – from the way Google sells advertising to the way telecom companies acquire airwaves from the government. The discoveries of Paul R. Milgrom and Robert B. Wilson, both of Stanford University, “have benefited sellers, buyers and taxpayers around the world,” the Nobel Committee said. Wilson was once Milgrom’s Ph.D. adviser, and the two also happen to be neighbors. Milgrom, 72, said students, friends and colleagues had long suggested he and Wilson, 83, might be due for the prize. The two men tackled the tricky problem of making auctions work efficiently. The committee said Wilson’s work showed “why rational bidders tend to place bids below their own best estimate of the common value” – which could mean the item goes for less than it’s worth and perhaps not to the buyer who most wants it, neither of which is supposed to happen if the auction is working properly. The work is about more than money. Some governments, for example, auction off the right to pollute in hopes of reducing emissions; cleaner companies can resell unneeded rights to dirtier ones, creating a financial incentive for companies to make their operations greener. One problem for sellers in auctions is the so-called winner’s curse. If buyers are vying to purchase, say, fishing rights, they have to make bids without knowing what the price of fish will be in the future. They begin to worry that they will only prevail by overpaying, and they can respond by scaling back their offers. A solution, Wilson and Milgrom’s research showed, is for the seller to provide as much information as possible before the bidding begins, perhaps providing an independent appraisal of the item being sold. Their research has had a big impact on the telecommunications industry, where private companies seek licenses from the government to use publicly owned radio frequencies for everything from mobile phone calls to internet payments. Before the 1990s, the U.S. government essentially conducted “beauty contests’’ to hand out the frequencies, letting companies make their case for getting the licenses. The approach encouraged aggressive lobbying but didn’t raise much money for the Treasury. In 1994, the U.S. government turned to auctions. Milgrom and Wilson (with help from Preston McAfee, now at Google) designed an auction format in which all the licenses were sold in one go. That format discourages speculators from buying up frequencies in a specific geographic area and then reselling them to big telecommunications companies seeking to patch together national or regional networks. The auction raised $617 million – selling frequencies that previously were handed out for virtually nothing – and became a model for countries from Canada to India. The format has also been used to auction off electricity and natural gas. Americans have figured prominently among this year’s Nobel winners. Leaving aside the peace prize, which went to the U.N.’s World Food Program, seven of the 11 laureates have been Americans. Goran Hansson, secretary-general of the Royal Swedish Academy of Sciences who announced the award, said that reflected American investment in research after WWII. Wilson said that, given the coronavirus pandemic, he had no immediate plans for what to do with his share of the the 10-million krona ($1.1 million) cash prize that comes with the award, along with a gold medal. Unlike the other Nobel prizes, the economics award wasn’t established in the will of Alfred Nobel but by the Swedish central bank in his memory in 1968, with the first winner selected a year later. It is the last prize announced each year.

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