US economists Paul Milgrom and Robert Wilson won the Nobel Economics Prize on Monday for work on commercial auctions, including for goods and services difficult to sell in traditional ways such as radio frequencies, the Nobel Committee said.
The Royal Swedish Academy of Sciences noted that the discoveries by Milgrom, 72, and Wilson, 83, "have benefitted sellers, buyers and taxpayers around the world," it said in a statement.
"Auctions affect all of us at every level. Moreover, they are becoming increasingly common and increasingly complicated," the academy said, listing examples such as flexible electricity prices set by daily auctions and countries raising funds through government bond auctions.
Milgrom and Wilson's work "gives us a better understanding of how we should design auctions," jury member Peter Fredriksson told AFP.
‘Winner's curse’
Wilson was spotlighted for developing a theory on auctions focusing on a common value, such as the future value of radio frequencies, or the rights to extract minerals in a particular area.
This common value "is uncertain beforehand but, in the end, is the same for everyone," according to the academy.
Wilson's work during 1960s and 1970s showed why bidders tended to bid under what they actually thought the good was worth.
The answer was that they feared the "winner's curse," or winning the auction but paying too much.
Milgrom then came up with a more general theory of auctions by analyzing bidding strategies in different auction forms, publishing his seminal papers around 1980.
Both professors at Stanford in the United States, Wilson was Milgrom's thesis advisor and they also live on the same street.
The academy noted that while "people have always sold things to the highest bidder," societies have also had to allocate "ever more complex objects... such as landing slots and radio frequencies" among users.
"In response, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue," the academy said.
They used their theories to create a new auction model that was put into practice by US authorities in 1994 to sell radio frequencies to telecom operators, and are applied by governments around the world in the current rollout of 5G networks.
The winners will share the prize sum of 10 million Swedish kronor (about $1.1 million, 950,000 euros).
Speaking to reporters in Stockholm via a telephone link, Wilson said the announcement had been "very happy news," conceding that despite his research focus he himself had "never participated in an auction".
However, he quickly had to retract his statement. "My wife is pointing out that we bought ski boots on eBay, I guess that was an auction," Wilson said.
David Ettinger, a professor of economics at the Paris Dauphine University, told AFP that while the word auction might conjure up images of auction houses like Sotheby's and Christie's, they are in fact ubiquitous, found in everything from online advertising to government contracts.
"Auctions have fascinated game theorists because it's rare to have applications in economic life where the terms are so clearly laid out. Negotiation is fuzzy, whereas in an auction... you make a bid and the best one wins," Ettinger said.
