The Royal Swedish Academy of Sciences recently announced the winners of the Sveriges Riksbank Prize in Economic Sciences 2020. The prestigious award has been awarded to Paul Milgrom and Robert Wilson, both hailing from the USA, for their significant contributions to the field of commercial auctions.
Understanding the Sveriges Riksbank Prize in Economic Sciences
Although it is frequently referred to as the Nobel Prize for Economics, this name is technically a misnomer. While the award is given in memory of Alfred Nobel, it is not one of the original five Nobel prizes that were established by Alfred Nobel’s will in 1895. Instead, it was created in 1968 via a generous donation from Sweden’s central bank, Sveriges Riksbank, to the Nobel Foundation to celebrate the bank’s 300th anniversary. The formal title of the award is “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.” Winners receive an award sum of about 10 million Swedish kronor which is approximately Rs 8.33 crore.
The Contributions of Paul Milgrom and Robert Wilson
Milgrom and Wilson have provided valuable advancements to auction theory, and have innovatively created new auction formats. Their research primarily focuses on commercial auctions featuring multiple interrelated items being sold simultaneously for societal benefit rather than maximum revenue.
Their research has provided numerous benefits to sellers, buyers, and taxpayers across the globe. Their techniques are particularly effective when auctioning goods and services such as radio frequencies, which traditionally have been challenging to sell.
Auction Theory: What It Is and Why It Matters
Auction theory is an area of economics that explores the design of auctions, the rules underpinning them, the behavior of bidders, and the outcomes. Auctions have a long history, with the oldest form being the sale of a bankrupt person’s assets to repay creditors. These auctions had a simple design: the highest open bidder would secure the property or commodity up for auction.
With time, auctions have grown more complex and are now used to sell a wide array of commodities like spectrum for radio or telecom use, carbon dioxide emission credits, electricity, or the rights to local garbage collection.
The design of an auction can significantly impact not just the buyers and sellers involved but also broader society. Three key variables need to be considered in auction design: the rules of the auction (such as closed/sealed bids, single bids versus multiple bids), the nature of the commodity or service up for auction, and the uncertainty surrounding information each bidder has about the object being auctioned.
How Wilson and Milgrom Enhanced Auction Theory
Wilson developed a theory for auctions where the objects have a shared, uncertain value that is ultimately the same for everyone. His research explained why rational bidders often bid below their own valuations due to concerns over the “winner’s curse”. The winner’s curse is the tendency for the winning bid to exceed the actual worth of an item.
Milgrom extended auction theory by examining bidding strategies across different types of auctions. Their pioneering work in this field has helped shape modern auction design and has significant implications for government policy and business strategy.
The contributions of Milgrom and Wilson in the realm of economics have brought them the well-deserved recognition of the Sveriges Riksbank Prize in Economic Sciences 2020. Their work on commercial auctions will continue to influence how we trade and distribute resources on a global scale.
