This year’s Nobel prize in economics was awarded to Paul Milgrom and Robert Wilson for their work on auction theory and design
IN 1991 ALVIN ROTH, who in 2012 would share the Nobel prize in economics, was asked to speculate about how the discipline might change over the century to come. “In the long term,” he wrote, “the real test of our success will be not merely how well we understand the general principles which govern economic interactions, but how well we can bring this knowledge to bear on practical questions of microeconomic engineering.
In the 1960s and 1970s, Mr Wilson began working out how to analyse these other scenarios. He first tackled cases in which the item for sale has some uncertain common value—for example, a plot of land with oil beneath it. Different participants may have different information about its precise value . In such cases, the winning bidder often discovers that the information others had about the common value led them to place a lower value on the auctioned item.
Much like Mr Roth, Messrs Milgrom and Wilson eventually put the knowledge gained from their theoretical work to practical use. Before the early 1990s, America’s government allocated portions of radio spectrum through unwieldy means: either through what economists call a “beauty contest”, in which bidders essentially explained why they deserved a slice of spectrum more than others, or by lottery.
As a result the researchers are more enmeshed in real-world problems than the typical prizewinner. Mr Milgrom advised Time Warner and Comcast, telecommunications firms, on their participation in radio-spectrum auctions in 2006; the work helped save his clients more than $1bn. In 2009 he co-founded a firm, Auctionomics, that provides consulting services to those looking to operate and to bid in auctions.
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