The 2020 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Paul R. Milgrom and Robert B. Wilson, both from Stanford University, “for improvements to auction theory and inventions of new auction formats", announced The Royal Swedish Academy of Sciences on Monday.
Milgrom and Wilson have studied how auctions work. 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. Their discoveries have benefitted sellers, buyers and taxpayers around the world, said the Academy.
Robert Wilson developed the theory for auctions of objects with a common value – a value which is uncertain beforehand but, in the end, is the same for everyone. Examples include the future value of radio frequencies or the volume of minerals in a particular area. Wilson showed why rational bidders tend to place bids below their own best estimate of the common value: they are worried about the winner’s curse – that is, about paying too much and losing out, read the press release.
Co-winner Paul Milgrom formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder. He analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding, added the press release.
Meanwhile, the prize amount of 10 million Swedish kronor will be shared equally between Robert Wilson and Paul Milgrom.