2020 Nobel Prize in Economic Sciences for improvements to auction theory and inventions of new auction formats to Paul R. Milgrom and Robert B. Wilson

Reporter: Aviva Lev- Ari, PhD, RN

UPDATED on 10/16/2020

The Nobel Prize for economic sciences this year went to Paul MIlgrom and Robert Wilson. Milgrom is recognized as one of the world’s great experts in auction theory, and I interviewed him for my book In the Plex (finally out in paper next February!) about Google’s clever AdWords approach to bidding, which was crafted by Google engineer Eric Veach along with his boss Salar Kamangar. I’d asked Milgrom to compare the AdWords system to the competitor, Overture: One fan of Veach’s system was the top auction theorist, Stanford economist Paul Milgrom. “Overture’s auctions were much less successful,” says Milgrom. “In that world, you bid by the slot. If you wanted to be in third position, you put in a bid for third. If there’s an obvious guy to win the first position, nobody would bid against him, and he’d get it cheap. If you wanted to be in every position, you had to make bids for each of them. But Google simplified the auction. Instead of making eight bids for the eight positions, you made one single bid. The competition for second position will automatically raise the price for the first position. So the simplification thickens the market. The effect is that it guarantees that there’s competition for the top positions.” Veach and Kamangar’s implementation was so impressive that it changed even Milgrom’s way of thinking. “Once I saw this from Google, I began seeing it everywhere,” he says, citing examples in spectrum auctions, diamond markets, and the competition between Kenyan and Rwandan coffee beans. “I’ve begun to realize that Google somehow or other introduced a level of simplification to ad auctions that was not included before.” And it wasn’t just a theoretical advance. “Google immediately started getting higher prices for advertising than Overture was getting,” he notes.

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From: WIRED’s Steven Levy <wired@newsletters.wired.com>

Date: Friday, October 16, 2020 at 8:00 AM

To: “Aviva Lev-Ari, PhD, RN” <AvivaLev-Ari@alum.berkeley.edu>

Subject: Clarence Thomas wants to rethink internet speech. Be afraid

Paul Milgrom (left) and Robert Wilson share the 2020 Nobel prize in economic sciences for improvements to auction theory and invention of new auction formats.

Image Credit: Elena Zhukova for the Stanford Graduate School of Business

UPDATED on 10/13/2020

 

Philip Ball

 

The 2020 Nobel prize in economic sciences rewards work on an ancient form of transaction that has acquired new complexity and urgency in the modern age: the auction.

Insights in auction theory made by Paul Milgrom and Robert Wilson, both of Stanford University in California, have found applications ranging from the pricing of government bonds to the licensing of radio-spectrum bands in telecommunications.

Diane Coyle of the University of Cambridge, UK, says that the Nobel, announced on 12 October, will be widely welcomed. “These two not only did foundational work themselves”, she says, “but also inspired cohorts of younger researchers.”

Economist Preston McAfee of Google agrees. “I, and thousands like me, use the fruits of their work on a daily basis to make markets work better — to improve pricing, to manage incentives, to facilitate decision-making, to increase efficiency.”

Their research has intersected with computer science and communications engineering to lay the foundations for many online platforms, Coyle adds.

Economist John Kagel of Ohio State University in Columbus, USA, called it “an outstanding selection”.

Online platforms such as eBay have raised public awareness of some of the complexities of auctions. There are many ways to stage them: for example, in a so-called “English auction” the item on offer simply goes to the highest bidder; whereas in a “Dutch auction” the selling starts from a high price, and bidders submit the price they are willing to pay.

But bidding is affected by many more factors that might reduce the seller’s final profit, cause losses for the winning bidder, create inefficiencies of allocation, or harm the public good. The work of the two laureates has helped to reduce these problems and to suggest new, more efficient ways for auctions to be conducted.

One problem is that different bidders can have different degrees of knowledge about an item for sale. For example, in a property auction, all bidders for a property will have access to some public information such as its resale value. But other kinds of information — such as hidden structural damage — will be private and not known to everyone.

A bidder who does not have such information might end up overpaying if they want to buy the property. They might be able to infer what others know about the value if bids are public – and people start to drop out – but not if bids are private.

In the late 1960s and 1970s, Wilson showed what happens to prices and profits in auctions when bidders have different degrees of private information.

Furthermore, if information about a property is highly uncertain — if the nature of the neighbourhood is rapidly changing, say — that could make buyers cautious and reduce the seller’s profit. In the 1980s, Milgrom — a former doctoral student of Wilson’s — developed models (partly in conjunction with Robert Weber of Northwestern University) that showed there is then an incentive for sellers to gather and share expert information with bidders, within different auction formats. The predictions of how such public information helps prevent losses to sellers and increases their revenue have been born out by experiments, says Kagel.

A spectrum of options

Auctions can be more complex when the goods for sale are divisible into parts or batches — for example, when governments sell licenses to companies bidding to operate in energy, telecommunications or transportation markets. One issue for such auctions is that sellers are vulnerable to collusion between buyers to keep the buying price down. Wilson’s work in the 1970s helped to identify these problems and to design new auctions to avoid them, for example in markets for electricity provision.

The sales of items might also be interdependent. A classic example in the 1990s was the sale of radio-frequency bands to telecom companies for mobile-phone networks — which many countries decided was best done through auctions.

If rights to frequency bands were simply auctioned region by region, a national telecoms company couldn’t be sure of acquiring the same frequency everywhere. And the value to them for one region would depend on whether they could buy the same frequency band elsewhere. The resulting patchwork of coverage would be inconvenient for users too.

To tackle such problems, Milgrom and Wilson (and independently, McAfee) devised the simultaneous multiple-round auction (SMRA). Here, bidders can place bids over several rounds of bidding. This gives them a chance to glean something about others’ private information while bidding, creating fairer and more efficient outcomes.

This approach was used in 1994 for auctioning telecom licenses in the United States, and has been adopted in Canada, India, and several European and Scandinavian countries. Milgrom has also devised other formats that ease some of the shortcomings of the SMRA.

“Unlike many theoreticians, Wilson and Milgrom brought their work to the real world, and transformed government policies toward auctions around the world,” says McAfee.

“There was no question that these two would win the Nobel prize at some point,” says economist Paul Klemperer of the University of Oxford. “It could have happened at any time in the past 20 years.”

“One could even imagine Paul Milgrom having a second Nobel prize,” he adds, for his work in information economics and industrial organization. Milgrom has given a Nobel acceptance speech before: in 1996, as a stand-in for William Vickery, who died three days after the announcement of his prize for laying the foundations of auction theory in the 1960s.

SOURCE

https://www.nature.com/articles/d41586-020-02904-2?utm_source=Nature+Briefing&utm_campaign=6b3b78efc9-briefing-dy-20201013&utm_medium=email&utm_term=0_c9dfd39373-6b3b78efc9-43323101

Prize announcement. NobelPrize.org. Nobel Media AB 2020. Mon. 12 Oct 2020

https://www.nobelprize.org/prizes/economic-sciences/2020/prize-announcement/

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2020

 

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2020 was awarded jointly to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.”

 

 

Prize announcement

Announcement of the 2020 Prize in Economic Sciences by Professor Göran K. Hansson, Secretary General of the Royal Swedish Academy of Sciences, on 12 October 2020.

“This prize is about avoiding the winner’s curse”

Immediately after the announcement, Tommy Andersson, member of the committee for the Prize in Economic Sciences, was interviewed by freelance journalist Joanna Rose regarding the 2020 Prize in Economic Sciences.