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Raul Bajo Buenestado, Professor of the School of Economic Sciences and researcher of the NCID of the Institute for Culture and Society of the University of Navarra.

Two economists who have bid high for the Nobel Prize

Tue, 13 Oct 2020 13:08:00 +0000 Published in Navarra Newspaper

Perhaps the reader has gone to the market this morning to buy fresh fish; or perhaps he has written a text message to a relative using his mobile; or maybe he has refueled at a gas station located on our highway network . If you have done any of these everyday activities, you may find it interesting to know that, in some way, your actions have been influenced by the work performed by the brand new Nobel laureates in Economics of this year 2020: Paul R. Milgrom and Robert B. Wilson, from Stanford University in California.

The Academy has decided to honor these two notable American economists for their important contributions to auction theory; a theory that, as I indicate above, influences many of our most routine actions. For example, the fresh fish we buy in the market is usually auctioned wholesale in the fish markets using the mechanism known as the "Dutch auction", in which the wholesaler starts from an initial price at which he offers his goods, which goes down until some bidder (i.e., some retail fishmonger) stops it. In the same way, the 4G and 5G telephony bands are assigned through a "sealed bid" process, in which the different telecommunications companies have to write down the cost they are willing to incur to develop the necessary infrastructure; thus, the development of such infrastructure is assigned to the company that offers it at the lowest cost. A similar process is used in Spain to grant designated spaces for service stations on toll highways.

The choice of one auction mechanism or another is by no means coincidental. In fact, it responds to the exhaustive analysis pioneered by Paul Milgrom and Robert Wilson, who have managed to explain which are the best types of auctions in each context, and why, based on the behavior of the participants. For example, Dutch auctions are used precisely in fish markets because they decrease the likelihood of collusion among retail fishmongers; which, of course, has a positive impact on your pocket, if you are a regular consumer of fresh fish. In another context, perhaps a bit more exotic, such as that of art auctions, the usual mechanism used is that of "open bidding" (or English auction), in which art collectors compete with each other "at the top of their voices", offering prices in an ascending order. If you have a piece of art that you want to get rid of, you may be interested to know that in this auction subject participants usually bid more than they had originally intended to do, as a result of the skill created in the face of the public by the "fight of bids with raised hands"; an effect that the laureates identified and defined in their writings as "the curse of the winner".

But the contributions of these authors have served not only to explain theoretically which are the best mechanisms in each context and why: all this theoretical development has served, subsequently, as a lever on which a complex and growing empirical analysis is based on millions of data obtained from all subject auctions worldwide. The most paradigmatic example for the application of this subject of work is offered by the American company eBay, on whose portal online hundreds (perhaps thousands) of auctions are held daily. Thanks to the theoretical development of these authors in conjunction with the subsequent empirical analysis, the mechanisms for allocating goods through auction processes have become more effective and efficient in recent years. This fact offers us a final lesson: there can be no serious and accurate data analysis without a rigorous theory to back it up. A theory that, on this occasion, has been well worth a award Nobel.