Two Stanford University professors have been awarded the Nobel prize for economics for their work on how auctions can be redesigned to benefit consumers.
Paul Milgrom, the Shirley and Leonard Ely professor of humanities and sciences at Stanford, and Robert Wilson, who is Adams distinguished professor of management, emeritus, shared this year’s final Nobel prize for their “improvements to auction theory and inventions of new auction formats”, it was announced on 12 October.
“They have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies,” explained the committee for the Sveriges Riksbank Prize in Economic Sciences, which has been awarded since 1968 and is also known as the Nobel Memorial Prize in Economic Sciences.
“Their discoveries have benefitted sellers, buyers and taxpayers around the world,” added the committee, which awarded the prize worth SKr10 million (£861,000).
The two scholars’ work centres on game theory and how bidders in auctions behave strategically by taking into consideration both what they know themselves and what they believe other bidders to know.
According to the Nobel committee, Professor Wilson, a Harvard University-educated economist who joined Stanford in 1964, developed the theory to explain why rational bidders tend to place bids below their own best estimate of an item’s value. The reason is fear of the winner’s curse – that is, finding they have paid too much.
Professor Milgrom, who took his PhD at Stanford and held academic posts at Northwestern and Yale universities before rejoining his alma mater in 1987, formulated a more general theory of auctions that demonstrated that a format will give the seller higher-than-expected revenue when bidders learn more about each other’s estimated values during bidding.
Their new formats have been used in the US and elsewhere to sell radio frequencies to telecoms operators.
“This year’s laureates in economic sciences started out with fundamental theory and later used their results in practical applications, which have spread globally. Their discoveries are of great benefit to society,” said Peter Fredriksson, chair of the prize committee.
