top of page

Auction Theory (Nobel Prize 2020, P. Milgrom and R. Wilson)

The 2020 Nobel Prize in Economics (October) is awarded to the Americans: Paul Milgrom and Robert Wilson for their work on auction theory, more precisely "for improvements to auction theory and inventions of new auction formats".

Auction Theory (Nobel Prize 2020, P. Milgrom and R. Wilson)

Auction theory is one of the most prolific branches of microeconomics. It has undergone major developments in recent years, not least because of the use of game theory and the considerable expansion of the auction field. Nowadays, this mechanism of price revelation is not only used by governments in the auction of their debt securities or in the art market, as it was historically the case. From specialised websites such as Ebay, to the marketing of broadcasting rights for sporting events, to the allocation of mobile phone frequencies, auctions are widely present in our contemporary economies.

An example of the application of the work of Robert Wilson and Paul Milgrom:

Auction theory, like the vast majority of work in economics today, makes extensive use of mathematical formalisation, which makes it difficult to popularise.

In the early 1990s, the Federal Communications Commission, which is responsible for regulating telecommunications and the content of radio and television broadcasts in the United States, was seeking to allocate new licences to meet the exploding demand for mobile communication. Until then, licensing had been based on lengthy, time-consuming hearings with uncertain outcomes, or on lotteries, which did not guarantee the greatest possible economic efficiency.

It was therefore decided to use an auction system. This was relatively simple to implement and would maximise the revenue received by the state.The auction system also had to meet a competitive imperative: strong competition between the different licence holders was considered by the Commission as a necessary condition to ensure high revenues for the State, as well as a good quality of service for consumers.

The two "Nobel Prize winners in economics", Robert Wilson and Paul Milgrom, then helped to set up a system of ascending auctions with several rounds. Each participant had to make a credible bid for at least one of the lots up for sale in order to continue the auction. Initially, prices were relatively low, but increased with each round. At the end of each round, a provisional winner was chosen for each item. The process was repeated until the auction ended for all items. The provisional winners of the last round were awarded the objects. This auction system enabled the Federal Communications Commission to raise nearly $20 billion for the US government in 1994, twice as much as originally anticipated.

Paul Milgrom is an economist and entrepreneur, aged 72, and his former thesis advisor, Robert Wilson, is 83.

The two Americans, professors at Stanford, were awarded for their seminal work on auction mechanisms, derived from game theory. They used their knowledge to devise new auction formats for goods and services that are difficult to sell in the traditional way," says the Academy. Their findings have benefited sellers, buyers and taxpayers around the world. They have also benefited Paul Milgrom, who runs his own start-up.

A graduate in mathematics and statistics with a PhD in microeconomics from Stanford, Paul Milgrom taught at Yale in the 1980s before returning to the Californian university, where he met his wife, Eva Meyersson, a Swedish-born sociologist. Paul Milgrom and his mentor Robert Wilson were approached by one of the candidates, Pacific Bell, to devise a new format. The two men devised a multi-round auction system to allocate frequencies simultaneously in different geographical areas.

bottom of page