Explaining The Nobel Prize In Economics

Two American economists have earned this year’s Nobel Memorial Prize in economic sciences for their work on auction theory and format. Paul Milgrom and Robert Wilson were awarded the prize not only for their contributions to our understanding of how auctions work, but for the practical impact they’ve had in creating rulesets to maximize the public good.

Auctions are a fundamental part of economies, affecting everything from small exchanges like eBay purchases to some of the largest sales there are, such as the distribution of radio frequencies by governments. They involved complex interactions, with limited information between many parties who often place different values on the item in question.

Wilson’s work on objects with a common value between actors, such as mineral deposits or radio frequencies, laid the groundwork for our understanding of auction dynamics. The theories he developed allowed world governments to convert what was an inefficient and fragmented radio market into a unified system and billions in public profits. His work continues to be used worldwide.

Milgrom studied the various strategies bidders employ, helping determine what rules resulted in the best outcomes. His work moved auctions toward formats that give more information to bidders and result in larger payments.

The two of them took their basic theories and developed them into systems that could be used by governments. Their formats prioritizing the public good were first instituted in 1994 for selling radio frequencies, and quickly adopted by governments beyond the U.S.

The prize committee emphasized the importance of collective good in their selection. In the press release announcing it, prize committee chair Peter Fredriksson said: “This year’s laureates in economic sciences started out with fundamental theory and later used their results in practical applications, which have spread globally. Their discoveries are of great benefit to society.”

Stanford President Marc Tessier-Lavigne touched on similar points in a press release, stating: “Their insights into bidding and pricing have become integral to our modern economy. Their work is a shining example of the ways in which both fundamental discovery and its application to practical solutions make enormous contributions."

The two will share just over $1 million in prize money.