What 5G auctions have to do with the 2020 Nobel Prize in Economics

What 5G auctions have to do with the 2020 Nobel Prize in Economics

Winners Paul Milgrom and Robert Wilson explored the theory governing public service calls and tenders between suppliers

Paul Milgrom and Robert Wilson Nobel Prize Winners for Economics 2020 (Illustration: Niklas Elmehed - © Nobel Media) The 2020 Nobel Prize in Economics awarded jointly to Paul R. Milgrom and Robert B. Wilson, both professors at Stanford University, was recognized for the commitment that the two scholars have put into the definition and development of auction theory, increasingly at the center of numerous transactions involving the sale of services and objects both in the private sector, especially online, and above all in the public sector.

Their research on the functioning of auctions has led to definition of new auction formats used above all for the assignment of various services and goods, such as frequencies in telecommunications or those relating to the c oncessions for oil exploration and drilling and in general to offers in the energy sector.

Wilson's reading

In particular, Professor Robert Wilson has developed a theory that borders on human sciences and especially investigates auctions of objects or services of common value, i.e. those in which the goods have the same value for each bidder but each of them can have different estimates of that value based on the information and considerations made by individual customers .

According to Wilson, this situation occurs in cases such as that of drilling rights for oil or precisely for radiofrequency auctions, where bidders will assign a different estimate to an object depending on the expectations and degree of knowledge of the situation. Here we can verify the case in which the offers will be lower than the real value of the asset for fear of paying too much, that is what happens with the winner's curse, when whoever wins the asset realizes that he has paid too much for it. value.

Milgrom's reading

For his part, Professor Paul Milgrom, who was also a student of Wilson at Stanford, has developed a theory according to which the private values ​​of an asset they may vary from one bidder to another based on knowledge of the property and the behavior of the contenders. From here, then, the two scholars have also developed auction forms in which different types of interconnected products are offered for sale, so as to ensure the best match between supply and demand.

From game theory to auctions

From the initial link with game theory, in the economic field, auction theory takes on an increasingly important value when the players in the field grow in the various commercial and supply sectors of services. For this reason, for example, the auction protocol developed by Milgrom and Wilson is now used by the Federal Communications Commission (FCC) for the allocation of telephone frequencies to the various companies.

The Academy of Sweden therefore wanted to reward with the highest recognition for economic sciences the development and development of a system in which adequate selection methods and tools become central to governments and institutions when selecting their trading partners in the way better.

In addition, this type of assignments and decisions are increasingly topical in very different areas, from the assignment of television or telephone frequencies, such as those of 5G, to the increasingly pressing ones relating to supplies of vaccines and health materials, essential for the future phases of the Covid-19 emergency.

Reading Bocconi

For Marco Ottaviani, professor of Econ omia of Bocconi, “thanks to the market rules that helped shape the market, it has become more efficient. They are truly school leaders who have shown the world how rigorous mathematical analysis can be combined with an important real problem ". For Pierpaolo Battigalli, professor of microeconomics and game theory and director of the Department of Decision Sciences at Bocconi, "Milgrom, in particular, together with Weber, had formulated a general theory of auctions considering various aspects, such as the private information they have the participants in the auction, if the asset has only private or common value ". While Wilson, he adds, has specialized more on this aspect, “on auctions for goods that have a common value that is not known at the time of bidding, but on which the different competitors have private information. He explained, for example, how you have to make bids below your best estimate of the value of the asset you are going to buy ".

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