Nobel Memorial Prize in Economic Sciences awarded to 2 US scientists for ‘auction theory’

The Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Sciences to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.” The prize amount of 10 million Swedish kronor, for the award officially known as Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, is to be shared equally between the Laureates.

The academy said that Milgrom and Wilson, both Stanford University professors, have studied how auctions work and 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. They added that the discoveries have benefitted sellers, buyers and taxpayers around the world. 

“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,” Peter Fredriksson, chair of the Prize Committee, said in a statement.

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Invention of new auction formats

Describing the achievement of the duo, the Royal Swedish Academy of Sciences said that researchers try to understand the outcomes of different rules for bidding and final prices using auction theory. Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously. 

Wilson 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. He showed that rational bidders are worried about the “winner’s curse”, i.e. about paying too much and losing out, and tend to place bids below their own best estimate of the common value. While Milgrom formulated a more general theory of auctions that not only allows common values but also private values that vary from bidder to bidder. 

“In 1994, the US authorities first used one of their auction formats to sell radio frequencies to telecom operators. Since then, many other countries have followed suit,” said the academy.

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