Meet The Sotheby's Of The Economic World: Nobel Laureates Paul Milgrom And Robert Wilson

Their contributions to the theory of auctions got Milgrom and Wilson the Economic Nobel. The duo's methods in everyday auction practices, especially the telecom sector, is invaluable.

By Chandan K Jha & Sudipta Sarangi

It was the middle of the night when the phone rang. He answered the phone, and then walked across the street and knocked on his neighbour’s door to congratulate him. Meet Robert Wilson and Paul Milgrom – winners of the 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, aka the Nobel Prize in Economics. Paul Milgrom is the Shirley R and Leonard W Ely Jr Professor of Humanities and Sciences at Stanford University. He is also a professor of Management Science and Engineering and has been at Stanford since 1987. Robert Wilson is the Adams Distinguished Professor of Management, Emeritus at Stanford and has been there since 1964. He is the one who walked across the street to wake up his neighbour and tell him that they had just won the Nobel Prize – for improvements to auction theory and inventions of new auction formats. Robert Wilson happens to be Paul Milgrom’s PhD supervisor. Incidentally two of Wilson’s other advisee’s Al Roth and Bengt Holmstrom have also received the Nobel Prize in 2012 and 2016 respectively.

Introducing auctions

All of us have a connection to auctions in some way or the other. Our mobile phone coverage, the sale of government bonds that forms a part of our portfolio – are all determined through auctions. Some of us may even have taken part in one to purchase something of a platform like eBay.

Different types of auctions are used in different contexts with the English and Dutch auctions being some of the oldest formats. An English auction begins with a low initial price and bidding goes on till there is only one participant left. In a Dutch auction, the opposite happens wherein the auctioneer starts with a high price and keeps lowering it until someone buys the item. The Dutch auction goes much faster – the Dutch needed a format to auction all those beautiful tulips that grow in the Netherlands. These auctions take place in the open – where participants can see what the other bidders are doing and are called open bid auctions. In contrast, all those government tender ads that you see in the newspapers are what we call sealed bid auctions where every participant submits a closed bid for the tender.

Auctions are also classified in other ways. In a first-price auction, the winner pays the highest price, that is, his own bidding amount. The highest bidder in a second-price auctions is the winner, but pays the amount bid by the second highest bidder. The game-theoretic analysis of English auction is similar to that of second price auctions, and Dutch auctions are strategically equivalent to first price auctions. An excellent introduction to these and other advanced topics on auctions can be found in Professor Vijay Krishna’s book titled Auction Theory.

An important fact about auctions is that winning may not always be a good outcome. Many times a bidder may get caught in a bidding war (or may not be well-informed) and even bid and pay more for an item than it’s worth or intrinsic value – a phenomenon known as the winner’s curse. A moment’s reflection will immediately tell us that the winner’s curse will be worse in first-price auctions and an auctioneer like the Government selling spectrum may not want that.