The previous Economic Nobel Prize was awarded to two neighbors (as seen on the funny door-knocking video).

Paul R. Milgrom and Robert B. Wilson won the Nobel “for improvements to auction theory and inventions of new auction formats.” Both American neighbors are experts on studies of information economics and game theory.

Understanding their work

First, we should define what an auction is. A seller creates a game with a predetermined rule set, and the buyers have to bid for the desired object according to their expectations. Think about broad definitions here:

• Seller: She decides who is getting the object. A seller could be a government agency or an algorithm.
• Buyers: They have an expected utility for the object and are willing to compete/pay for it.
• Object: Anything that buyers may desire. From a piece of art to owning a hospital.
• Expectations: In many auctions you cannot know what is the real or future value of the object. So, how you decide how much to pay? Buyers must use their “private values” — information only they own, and “common values” — information open to the public or what they can observe from other bidders.

By the way, you can listen and read directly to the laurates through the following links or keep reading my summary.

According to the Nobel Foundation review (2020), there are four main types of auctions:

• English Auction — open-bid (everyone sees each other’s bids). Prices start low, and bidders place incremental bids until no one is willing to bid a higher price. The English Auction is the most common concept of Auction we all have.
• Dutch, Clock Auction, or Descending-Price auctions — Prices start high, and the seller gradually decreases it until a buyer is willing to pay it.
  For example, you are selling a car. You probably will ask for a high price. After some time, you will decrease the price until someone buys it.
• First-Price Auction — sealed-bid (Buyers cannot see other’s bids). Bidders place a single bid, and the higher price wins the objects.
• Second-Price Auction — sealed-bid. Bidders also place a single bid, and the higher price wins but pays the second higher price.

Choosing the correct type of Auction, or game, can increase the earnings for the seller and place the object in the right buyer. Because “the object” can be rights to exploit a natural resource, the monopoly on electricity in a district, or what provider will sell 5G in your country. Not choosing the “right buyer” may lead to pollution, high prices, or poor quality of essential services.

The Winner’s Curse

Capen (1971) observed that buyers of oil-drilling leases paid more than the property’s worth. A buyer that overestimates the value of an object will be willing to pay more than other bidders. He will win, but he will do it by paying more than the object’s worth and being curse by winning.

Sometimes having information about other buyers’ expectations can lead to the winner’s curse. You may overestimate the demand for an object and offer a higher price. Think about Gamestop or bitcoin fluctuations.

Information asymmetry plays a significant role when designing and playing a game. The seller tries to ensure that buyers will compete in a fruitful way for her, and buyers try to use all their advantages to profit.

Failing to account for information asymmetry may lead a winner to overpay. Being curse by winning something less valuable than what she paid.

New Auction Types:

Milgrom and Wilson propose new auction types:

• Share Auctions (1979): In Wilson’s game, the buyers bid for many objects using strategies to “shade” their motivations or even coordinate between competitors. Do you think this would benefit if the buyers are bidding for phone coverage rights? Probably we would end up paying extra.
• Auctioning Interrelated Objects (1990s): When buying complementary objects, the seller must be sure that one owner is what she wants. If you are an artist, would you like that only one person to own all your pieces? If you are trying to promote an industry, would you prefer that only one company owned all the licenses?
• Simultaneous Multiple Round Auctions (2004): Many objects are sold in multiple rounds until all supply is covered. The sequence prevents big bidders from monopolizing a property and promotes small bidders.

These auctions have been celebrated because of an increase in the tax-payer savings and the industry promotion generated.

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Source: https://medium.com/the-social-research/the-auction-theory-why-they-won-the-nobel-prize-b99a3f19d329?source=rss——-8—————–cryptocurrency