This is 2020: the Nobel laureate in economics was informed about the award by an unexpected visit in the middle of the night

The Swedish Academy has announced the names of the 2020 Nobel Prize in Economics. The prize will go to American economists Paul Milgrom and Robert Wilson for developing the theory of auctions. Writes about it with the BBC.

Photo: Shutterstock

Milgrom, 72, and Wilson, 83, were among the top contenders for this year's award. The prize was awarded to them “for refining the theory of auctions,” said a spokesman for the Nobel Committee. This theory is about how people behave in markets that operate like an auction. Scientists' findings apply to other life situations as well.

Couldn't get through

The Nobel Committee was unable to contact the economics laureate Paul Milgrom, so another laureate, his colleague and neighbor Robert Wilson, came to tell him about the award right in the middle of the night. This is reported on Twitter at Stanford University, where they both work. Esquire.

According to the published video from the intercom surveillance camera, Wilson and his wife came to Milgrom's house at night and strenuously tried to call and reach the economist. “Paul, this is Bob Wilson. You received the Nobel Prize. They tried to contact you, but they did not have your number, ”he says.

The #NobelPrize committee couldn't reach Paul Milgrom to share the news that he won, so his fellow winner and neighbor Robert Wilson knocked on his door in the middle of the night. pic.twitter.com/MvhxZcgutZ

- Stanford University (@Stanford) October 12, 2020

His wife said they gave Wilson's number to the Nobel committee. "So will you answer the call?" She asked playfully.

Not quite a Nobel Prize in economics

“The new auction formats are a great example of how simple research can later become the basis for inventions that benefit society,” the Swedish Academy said in a statement.

Last year, Michael Kremer of Harvard and wife Esther Duflo and Abhijit Banerjee of MIT received the award. They are have developed a new approach to finding recipes for fighting poverty.

Milgrom and Wilson fit well with the most common type of Nobel laureate in economics - an American male over 55.

The Nobel Prize in Economics is not exactly a Nobel Prize. Officially, it is called the Swedish State Bank Prize for Economics in memory of Alfred Nobel.

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In 1968, in honor of its 300th anniversary, the central bank of Sweden, Sveriges Riksbank, donated a large sum of money to the Nobel Foundation in order to establish another prize - in economics.

The winner of the economic prize is chosen by the Swedish Academy of Sciences. It is guided by the same rules as for awarding outstanding work in other scientific disciplines.

The Nobel Prizes will be awarded on December 10, but this year, due to the COVID-19 pandemic, the ceremony will be held virtually and without a traditional banquet.

What are the auctions

When it comes to auctions, many people immediately think of selling paintings or antiques. However, auctions affect the life of every person - it is by this mechanism that prices for advertising are determined, for the cost of government contracts, for frequencies for mobile communications, as well as for many other services and goods.

There are different types of auctions. For example, auctions with open and closed quotations. An auction can have one seller and many buyers, many sellers and one buyer, and an unlimited number of bidders on both sides.

Research by Milgrom and Wilson has helped to understand why bidders behave in certain ways. Scientists have invented new types of auctions that allow bidders to maximize their benefits.

One of the most popular types of auctions is the English auction. It is used in the sale of paintings, antiques and other goods. In the course of an English auction, bidding begins at the minimum price for which the owner of the goods is willing to sell them. The auctioneer gradually increases the price.

Participants who are ready to buy an item for this price must express their consent. Trades stop at the moment when no one agrees to the next increase - and the goods go to the one who agreed with the previous price.

Also common is the Dutch auction, where the auctioneer names the highest price, and then lowers it until one of the participants agrees to buy the product. Large consignments of flowers, food products, and furs are sold at such auctions.

In addition, tenders are quite common in which, unlike the English and Dutch auctions, the bidders' bids are not known to other bidders. During such auctions, participants submit their price proposals in envelopes, or place bids through a website or program. The winner of the auction is the one with the highest bid.

If we are talking about bidding for the right to receive a government contract, the winner is the supplier who offered the lowest price - such auctions are called reverse auctions.

Where is the benefit

Economists have been trying for many years to understand which auction will be more profitable for the owner of the goods and society as a whole in which case. Difficulties in such an analysis are associated with the fact that participants build a trading strategy based on their own ideas about how other participants will act.

The participants' ideas about the subject of the bargain depend on how they assess the individual value and the social value of the goods, noted in an article on the Nobel Prize website. As an example of individual cost, an auction is given where a dinner with a celebrity is played.

Most of the goods and services put up for auction have a social value, and it is one for all. At the same time, the willingness of participants to pay a certain amount for the goods differs depending on the information they have about the subject of the auction.

The winner of a public value item may face the so-called “winner's curse” when the benefit is lower than the price paid. For example, an oil company in its quest to win an auction for the right to develop a field may pay a certain amount, and the income from the sale of oil will ultimately be lower than this amount.

What was the prize for

Robert Wilson was one of the first scientists to analyze the behavior of bidders in public value goods.

In his works in the 1960s and 1970s, he showed that during such auctions, due to a lack of information about a product, buyers will offer less than they think the product is worth. Buyers will be cautious for fear of the “winner's curse,” and the final amount the seller will receive may be less.

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In most cases, a product has both individual value and social value. For example, when buying an apartment, the buyer rates it based on personal preference and the price for which he could sell the apartment in the future.

Subsequently, Paul Milgrom showed that information about the assessment of goods by different players plays an important role at auctions. The more such information, the higher the likelihood for the seller to receive a fair estimate. For example, the seller of a home should be motivated to provide bidders with as many independent estimates of the value of the home as possible before bidding.

What auction did they come up with

Milgrom and Wilson not only analyzed and improved existing mechanisms. Together with another American economist, Preston McAfee, they invented a new type of auction - the simultaneous multi-round auction, which was first used in the allocation of frequencies for mobile communications in the United States.

Practice has shown that the frequency allocation mechanisms that existed at that time in the United States were not suitable.

The main difficulty was that mobile operators wanted to have one or more frequencies throughout the country in order to build a national network. Before that, the distribution was carried out at the regional level (there were different opinions in the business community as to what licenses should be - regional or national). As a result, companies received a set of different frequencies in different regions.

The cost of a particular frequency in a particular region for a particular operator depended on what other frequencies this operator has in this region and throughout the country.

To make the auction as effective as possible, trading at a certain frequency had to be carried out all over the country at once for many participants. The mechanism proposed by Milgrom, Wilson and McAfee called for bidding in multiple, time-limited rounds.

Participants raise their stakes in each round. Price offers become known to the participants after the close of the round. In between rounds, bidders can study competitors' proposals and adjust their strategy. The number of rounds is unlimited and the auction ends when new bids cease to arrive. Thus, the owner of the product receives the maximum price for the product.

As noted in an article on the Nobel Prize website, this new mechanism has proven to be popular and successful. The US government has raised $ 20 billion over 120 years through the sale of frequency licenses. Many other countries also use the simultaneous multi-round auction for frequency allocation.

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