Auction theory, practical applications take 2020 Nobel Prize in economics

Two Stanford University economists were awarded the 2020 Nobel Prize in economic sciences on Monday for their work in auction innovations that provide crossover applications for the allocation of scarce resources.

Paul R. Milgrom and Robert B. Wilson were recognized for improvements to auction theory that have already shown practical application in allocating public goods, including radio spectrum, fishing quotas and airport logistics, The Wall Street Journal reported.

Content Continues Below

“(Milgrom and Wilson) haven’t just profoundly changed the way we understand auctions — they have changed how things are auctioned. The two of them are some of the greatest theorists living in economics today,” Nobel laureate Alvin Roth told The New York Times.

The prize committee credited Wilson as “the first to create a framework” for auctions comprised of items, such as commodities, with a common value, as opposed to variable private value.

Meanwhile, Milgrom’s work focused on how to deal with a mix of common and private value, such as during the purchase of a home when buyers weigh both the personal value they attach to amenities a property possesses as well as the property’s market value.

Specifically, he determined that people underbid by less in “so-called English auctions, in which prices start low and are raised, than in Dutch auctions, where they start high and are reduced,” the Times reported.

Collaboratively, however, the pair were recognized for leveraging these new auction formats in applicable ways, including the format that governments now use to allocate radio frequencies to telecommunications operators. The prize-winning economists' approach allows for the simultaneous auctioning of various geographic areas of the radio spectrum across multiple bidders – starting with low prices and allowing repeated bids – boosting the profitability of the process.

Peter Fredriksson, chairman of the prize committee, championed the economists' contributions to the betterment of society, noting they “started out with fundamental theory and later used their results in practical applications, which have spread globally.”

The winners, themselves, cited during a Monday news conference at Stanford the myriad practical applications for auction theory, including Wilson’s work on diamond pricing and Milgrom’s take on respirator allocation bottlenecks in the United States, early in the novel coronavirus pandemic, the Times reported.

“We need well-thought-out systems, and part of what we do in market design is try to think about all of the aspects of systems — competition, distribution, solving hard, complex problems,” Milgrom said, noting poor market design contributed to the early ventilator bottleneck because states were forced to bid against each other for available equipment without ever expanding that product’s supply.

Monday’s announcement also gave the United States a clean sweep of the 2020 Nobel Prizes, with at least one U.S. citizen winning in each of the five categories, the Journal reported.

“There has been an enormous investment in research in the U.S., and that has paid off,” said Göran K. Hansson, secretary-general of the Royal Swedish Academy of Sciences, which awards the prize in economics.

Read about the other 2020 Nobel laureates below: