Auction theorists win the 2020 Nobel prize for economics

Both Milgrom and Wilson are pioneering researchers in auction theory. The winner’s curse in common value auctions introduced by Milgrom and the demand reduction in uniform-price auctions introduced by Wilson are among the most significant results in auction theory. But why did people think auction theory got to its end, and why did two auction theorists win the Nobel prize?

To answer the above questions, we need to first distinguish between two types of auctions: single-unit and multi-unit auctions. Single-unit auctions are those where only one indivisible object is available for sale in the auction. Examples are art auctions, house auctions and even online auctions.

Multi-unit auctions are those where there are multiple units or a share of a divisible good available in a single auction. For instance, treasury auctions and auctions for spectrum licenses. While single-unit auctions are more traditional and have been used for centuries, multi-unit auctions were developed mostly by scientists during the past 60 years.

Also, multi-unit auctions are much more significant in terms of value. For instance, one of the spectrum auctions that Milgrom designed, allocated approximately US$20 billion of spectrum licenses.

During the 80s and 90s, where auction theory was a very hot topic among theorists, most of the focus was on single-unit auctions. Economists provided very general and conclusive results for several variations of single unit auctions. However, due to technical difficulties, less than one in ten of the papers in auction theory considered the possibility of multiple units in one auction.

In today’s world, multi-unit auctions are becoming increasingly important and the research on them goes beyond the science of economics. Tech giants like Google and Amazon spend millions of dollars on research related to these auctions. As a result, computer scientists, operation researchers, marketing and finance researchers are now provide research outputs on auctions.

According to the Nobel prize committee, Wilson and Milgrom’s Nobel prize is awarded because “Their theoretical discoveries have improved auctions in practice”. This indicates the importance of auctions in practice and how theoretical innovation can help to improve them. In my opinion, their greatest contribution in this body of work was to use theoretical innovations to design new auctions for practical purposes.

I believe the game has just started. During the past decade, the use of auctions in market mechanisms for new and emerging markets have been significantly increased. Examples are pollution permit markets, online advertisement and cryptocurrency markets. This increasing trend will continue as long as researchers are able to design new and effective auctions for the allocation of goods and services.

Peyman Khezr - School of Economics, Finance and Marketing