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18 October, 2020
5 Min Read

What did the 2020 Economics Nobel winners discover about auction theory?

Context:

American economists Paul R. Milgrom and Robert B. Wilson have been announced as the winners of the 2020 economics Nobel Prize/Sveriges Riksbank Prize.

Auction theory:

All economies have to figure out the allocation of the limited supply of resources to satisfy unlimited human needs.
Auctions are important because they are the most widely used and also the most efficient mechanism to allocate scarce resources in an economy.
Auctions help ensure that scarce resources are allocated to people who value it the most.
From the seller’s point of view, selling goods to the highest bidder helps the seller maximise his or her revenues.
Auctions happen almost everywhere in the modern world, some explicit like the auction of mining and spectrum licences and some implicit like the sale of goods and services.
Auction theory is a branch of economics that deals with auctions. Auction theory aims to improve seller revenues, increase benefits to consumers, or even achieve both these goals at the same time.

Winner’s curse

The most common criticism of auctions is that they can lead buyers to overpay for resources whose value is uncertain to them. This is popularly known as the ‘winner’s curse.

News:

The award recognizes the duo’s contributions to improvements to auction theory and inventions of new auction formats and also their implementation.
Milgrom and Dr Wilson, are most popular for their contribution to devising new, real-world auction formats. The combinatorial auctions designed by the duo, has been used to sell complex goods such as spectrum as bundles, instead of as individual units.
The contributions of Dr Milgrom and Dr Wilson have helped governments and private companies design their auctions better.
This has, in turn, helped in the better allocation of scarce resources and has also allowed the sellers to maximize their revenues while still ensuring that the buyers also stand to benefit.
This has proved to be an incentive for sellers to produce complex goods and has thus proved to be providing an impetus to the whole economy.

Source: TH

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