Wed. Oct 28th, 2020

The economic Nobel Prize in 2020 can raise only one question: why the Nobel Committee, over the past 20 years, more than once noting the contribution to the theory of auctions by later authors, noted the contribution of Bob Wilson and his student Paul Milgrom just now? Their work is fundamental (Wilson and Milgrom have theoretically substantiated the effectiveness of complex auctions) and, it seems, are not only important for the sale of something under the hammer. Wilson’s basic idea of ​​a plurality of components in a specific price bid is, in principle, applicable to any market transaction. Still, economists are more interested in the practical development of these ideas by Milgrom in the form of a variety of new auction formats.

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The importance of the theory of auctions for modern economics has been marked by more than one or two awards from the Swedish Riksbank (the Nobel Prize in Economics) over the past decades. William Vickrey, the actual founder of this theory in the 1960s, received the award in the year of his death – 1996; John Nash, John Harshany, and Reinhard Selten, whose achievements developed including the theory of auctions in the 2000s, were noted by the Nobel Committee in 1994; Leonid Hurwitz, Roger Myerson and Eric Maskin with their theory of mechanisms – in 2007.

The theory of auctions is part of the “bundle” of mathematized branches of economics, which, along with game theory, is now its basis. Nevertheless, Wilson, who back in the 1960s, developed from Vickrey’s basic assumptions a theory in which partial and general components in the structure of price expectations and bids at auctions are separated, and Milgrom, who based on the works of his scientific advisor, created a complex theory of auction design (in the final assuming, by the way, that for the best sale of anything, one can come up with an ideal auction format that will show the best price in terms of the selected criteria), received the Nobel just now.

The problem that Wilson and Milgrom solved, in a strong simplification, looks like this: an item being sold at auction (or any right to it) has a different rating for each participant.

In it, the authors suggest a common component for all participants – for example, the price for which this item can be instantly sold at any time – and a private component that is different for all. Information about the sale object among the bidders (not only the traders but also the auctioneer, seller, third parties) is unevenly distributed. Moreover, in the real world, the price offered at a particular auction may depend on the (known or unknown) results of another (future, past or ongoing) auction. Players’ strategies, primarily informational ones, can change at the auction. Regular auctions (which usually mean the simplest English – up) are rarely optimal for the seller to maximize the price. Finally, there is the question of whether

By the way, Milgrom answered the last question positively, showing how completeness of information improves auctions’ properties. But that was only the beginning: parallel, multi-round and combinatorial auctions, CMRA and CCA, were hits in the 1990-2000s on the governing market, allowing to solve many problems, primarily buyers, while increasing the efficiency of the process for sellers.

At the same time, the theoretical achievements of Wilson and Milgrom were actively used in less “narrow” areas – for example, in game theory and the theory of the securities market.

However, they are in the message of the Nobel Committee are sparingly mentioned: although the theory of auctions is only in a narrow sense, a theory of how best to organize a public auction, it is still often viewed in this capacity. Meanwhile, apparently, the main observations of the Nobeliates in 2020 apply to any price bids in any transactions – even in bilateral negotiations, potential (and almost always real) alternative participants are always implicitly present with their own strategies and particular and general components of assessments. It is easy to imagine the economic space as an extremely complicated auction – Wilson and Milgrom, and even more so all those who develop their developments of the 1970s and 1990s, are now demonstrating how incomprehensible its complexity can still be, citing the Nobel Committee, “in reality the world. ”

 

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