The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2020 has been awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats”. They are worthy recipients of the highest honour in economics.
Wilson developed a bidding model for perfect competition. He argued that in a closed auction (in which other bidders cannot see each other’s bids) the highest bid will be equal to the true value. This reveals the common value, leading to a mutually beneficial equilibrium outcome without requiring sharing of information in advance between seller and buyers (as is often the case to resolve game theory problems).
On the other hand, Milgrom theorised that auctions not only allow the revealing of a common value but also differing private values between bidders. By analysing various bidding strategies across auction formats, Milgrom concluded that revenues are higher when bidders can learn about each other’s bids.
Auctions are a sensible tool when there are multiple potential uses of a scarce resource. Actions reveal value and ensure an efficient allocation: whoever is willing to bid the highest in an action are showing they would get the most value relative to the other potential users.
*"Milgrom and Wilson show how theoretical insights in economics can deliver immense human benefit. Auctions have ancient roots, but their ideas provided new insights and applications."
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