Expained: The economics of auctions

 The Indian Express

October 13, 2020

On Monday, the Royal Swedish Academy of Sciences awarded this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel — popularly, albeit incorrectly, referred to as the Nobel Prize for Economics — to Paul R Milgrom and Robert B Wilson. Both winners are currently with Stanford University, where they teach in different departments.

In its announcement, the Academy said the pair were receiving the award for “for improvements to auction theory and inventions of new auction formats”. They will equally share the 10 million Swedish kronor award money — roughly Rs 8.33 crore.

What is auction theory?

Essentially, it is about how auctions lead to the discovery of the price of a commodity. Auction theory studies how auctions are designed, what rules govern them, how bidders behave and what outcomes are achieved.

When one thinks of auctions, one typically imagines the auction of a bankrupt person’s property to pay off his creditors. Indeed, this is the oldest form of auction. This simple design of such an auction — the highest open bidder getting the property (or the commodity in question) — is intuitively appealing as well.

But over time, and especially over the last three decades, more and more goods and services have been brought under auction. The nature of these commodities differs sharply. For instance, a bankrupt person’s property is starkly different from the spectrum for radio or telecom use. Similarly, carbon dioxide emission credits are quite different from the spot market for buying electricity, which, in turn, is quite different from choosing which company should get the right to collect the local garbage.

In other words, no one auction design fits all types of commodities or seller.

Reference: https://indianexpress.com/article/explained/economics-of-auction-nobel-prize-paul-r-milgrom-robert-b-wilson-6722558/

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