Nobel in Economics: What Is Auction Theory? | Summachar | Editorji
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Nobel in Economics: What Is Auction Theory? | Summachar

Oct 30, 2020 11:48 IST

NOBEL PRIZE
Paul R. Milgrom and Robert B. Wilson were awarded Nobel Prize in Economics in 2020 for improving the auction theory
So far, the Nobel Prize in Economics has been awarded 51 times - 89 laureates have been honored
Last year Indian-American economist, Abhijit Vinayak Banerjee, his wife Esther Duflo, and Michael Kremer won Nobel Prize in Economics for “their experimental approach to alleviating global poverty”

WHAT ARE AUCTIONS?
Auctions are all around us. It won’t be an understatement to say IPL has acquainted most of us to auctions.
It is a process where people bid to purchase any goods and services
In Economics, it is considered one of the efficient mechanisms for distributing resources
Moreover, internet platforms have made auctions very dynamic and bidding process very easy


UNDERSTANDING SOME TERMS
COMMON VALUE
Common value is inferred as the true value of the product that is perceived to be same for everyone
Therefore, the actual value of the product is same for all bidders
Example: Spectrum auction, drilling auction

PRIVATE VALUE
It is referred to as the independent valuation of the product
Each bidder has different ‘perceived value’ of the product

ENGLISH AUCTION
In English auction, bidding starts with low prices and increases over time
Example: IPL Auctions

DUTCH AUCTION
Bidding starts with a high price and descends over time
The price descends until someone is ready to buy the item or if it reaches a predetermined reserve price

AUCTION THEORY
Auction Theory was first academically presented by William Vickrey, who developed the Vickrey Auction and even won the Nobel Prize in 1996 for advanced work in auction theory. Auction Theory focuses on three main features of auctions:
1. Type of bidding, number of times one can bid and pricing
2. How the information a bidder has about the object affects the auction
3. How bidders value auctioned object

Vickrey’s auction was a closed-bid auction in which no bids were disclosed. In it, the highest bidder (winner) pays the second highest price.
Winner’s curse is a phenomenon in which a person for whom the private value of a product is higher may end up paying much higher than the actual value
Wilson showed how bidders’ attempts to escape winner’s curse may result in lower revenue for seller or failure of the auction
Milgrom’s work showed that bidders get leverage when they have information

EXTENSION TO AUCTION THEORY
Milgrom and Wilson extended the English Auction format to more than one item, and multiple rounds and named it Simultaneous Multi-Round Format
In this format bidders can bid for multiple items in each round
At the end of a round, the highest bid and the bidder on each item is declared
Sometimes all the bids are disclosed after a round, or sometimes only highest bids are disclosed (like closed-bid auction of Vickrey) - depends on the auction rules or activity rules
Auction ends when there is no one raising the bid. The highest bidders for each item then receive it for the bid price.

IMPLICATION
Robert Wilson and Paul Milgrom showed application of Auction Theory
They designed auction strategy for allocating radio spectrums to telecom operators in 1994 in US
It proved to be beneficial to all the three stakeholders i.e. government, telecom companies and public
Between 1994-2014, US government earned $120 billion using their Auction model
This strategy is widely used across countries and across sectors such as electricity and natural gas, which require efficient allocation due to their limited supply

DID YOU KNOW?
THE WORD "AUCTION" IS DERIVED FROM THE LATIN ‘AUCTUM’ MEANING, I INCREASE
For most of history, auctions have been a relatively uncommon way to negotiate the exchange of goods and commodities. The practice picked up after the 17th Century