Americans Milgrom, Wilson win Nobel in economics for 'improvements to auction theory'

Two Americans won the Nobel in economics on Monday for improving the theory of how auctions work and inventing new and better auction formats that are now woven into many parts of the economy, including one that revolutionized the telecom industry.

Award comes against backdrop of COVID-19 lockdowns, sharp decline in business activity

The winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2020 are seen on this slide at a news conference Monday. Americans Paul R. Milgrom, left, and Robert B. Wilson won the Nobel in economics for 'improvements to auction theory and inventions of new auction formats.' (Anders Wiklund/TT/The Associated Pres)

Two Americans won the Nobel in economics on Monday for improving the theory of how auctions work and inventing new and better auction formats that are now woven into many parts of the economy, including one that revolutionized the telecom industry.

The discoveries of Paul R. Milgrom and Robert B. Wilson "have benefitted sellers, buyers and taxpayers around the world," the Nobel committee said, noting that the auction formats developed by the winners have been used to sell radio frequencies, electricity, fishing quotas and airport landing slots.

Both economists are based at Stanford University, which said their work is credited with shaping the entire modern telecommunications industry after they developed a new format for the U.S. Federal Communications Commission's radio spectrum auctions in 1994. That format has since been copied and adapted for dozens of auctions involving hundreds of billion dollars worldwide.

A knock from his co-winner neighbour

Reached by phone at his home in California, Milgrom said he received news of their win "in a strange way."

"I got a knock at my door from Bob Wilson," he told The Associated Press. "He was my PhD adviser, and he lives right across the street from me."

Milgrom said students, friends and colleagues had long suggested he and Wilson might be due for the prize.

"It's really sweet actually," he said. "It's nice to have their respect but their affection as well."

Technically known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the award was established in 1969 and is now widely considered one of the Nobel prizes. The winners were announced in Stockholm by Göran Hansson, secretary general of the Royal Swedish Academy of Sciences.

'Snake in the grass strategy'

The committee said Wilson's work showed "why rational bidders tend to place bids below their own best estimate of the common value."

"[Bidders] are worried about the winner's curse — that is, about paying too much and losing out," the committee said.

Among the problems that the two tried to tackle was the "snake in the grass strategy," Wilson said. This involves a company keeping its interest in the item being sold secret for most of the auction and then making the winning bid at the last minute.

"It's like sniping an eBay auction," Wilson told the AP. "We had to design rules that at that time sort of restricted that kind of activity."

This involved forcing bidders to reveal their interest earlier on, he said.

A bronze bust of Alfred Nobel is pictured before the Nobel Prize ceremony at Stockholm Concert Hall in this December 2019 photo. (Claudio Bresciani/TT News Agency/Reuters)

Wilson said his interest in auction theory dated back to the 1950s and that he thought the time for winning a Nobel had already passed.

Speaking to reporters in Stockholm by phone after learning of his win, Wilson struggled to think of a recent auction he himself had participated in. But then added: "My wife points out to me that we bought ski boots on eBay."

The 83-year-old described his former student as "sort of the genius behind all of this auction work."

Milgrom, 72, developed a more general theory of auctions that takes into account what is known as the "private value" of what's being sold that can vary greatly from bidder to bidder.

7 U.S. winners

Americans have figured prominently among this year's Nobel winners. Leaving aside the peace prize, which went to the UN World Food Program, seven of the 11 laureates have been Americans.

"After the Second World War, there's been an enormous investment in research and higher education in the United States and that has paid off in all the sciences," said Hansson. "And we'll see how that trend may change in the future."

Last year's Nobel in economics award went to two researchers from the Massachusetts Institute of Technology and a third from Harvard University, for their groundbreaking research into efforts to reduce global poverty.

Few economists could have predicted last fall that the globe would come to a virtual standstill within months, as governments closed their borders, imposed lockdowns and ordered other measures to stop the spread of COVID-19, triggering a sharp dip in business activity worldwide.

Wilson said that, given the ongoing pandemic, he had no immediate plans for what to do with his share of the the 10-million krona ($1.5 million Cdn) cash prize that comes with the award, along with a gold medal.

"There's not much I can use it for, in terms, you know, travel or something," he told reporters on the phone from Stanford. "Probably I'll just save it for my wife, my children."

Last Monday, the Nobel committee awarded the prize for physiology and medicine for the discovery of the liver-ravaging hepatitis C virus. Tuesday's prize for physics honoured breakthroughs in understanding the mysteries of cosmic black holes, and the chemistry prize on Wednesday went to scientists behind a powerful gene-editing tool.

The literature prize was awarded to American poet Louise Glück on Thursday for her "candid and uncompromising" work. The World Food Program won the Nobel Peace Prize on Friday for its effort to combat hunger worldwide.