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October 14, 2020 10:10 pm

Winning Bid: How Auction Theory Took the Nobel Memorial Prize in Economics

Tim Harford, writing for Financial Times: A well-designed auction forces bidders to reveal the truth about their own estimate of the prize's value. At the same time, the auction shares that information with the other bidders. And it sets the price accordingly. It is quite a trick. But, in practice, it is a difficult trick to get right. In the 1990s, the US Federal government turned to auction theorists -- Milgrom and Wilson prominent among them -- for advice on auctioning radio-spectrum rights. "The theory that we had in place had only a little bit to do with the problems that they actually faced," Milgrom recalled in an interview in 2007. "But the proposals that were being made by the government were proposals that we were perfectly capable of analysing the flaws in and improving." The basic challenge with radio-spectrum auctions is that many prizes are on offer, and bidders desire only certain combinations. A TV company might want the right to use Band A, or Band B, but not both. Or the right to broadcast in the east of England, but only if they also had the right to broadcast in the west. Such combinatorial auctions are formidably challenging to design, but Milgrom and Wilson got to work. Joshua Gans, a former student of Milgrom's who is now a professor at the University of Toronto, praises both men for their practicality. Their theoretical work is impressive, he said, "but they realised that when the world got too complex, they shouldn't adhere to proving strict theorems."

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