“Their discoveries have benefited sellers, buyers and taxpayers around the world,” the prize committee said.
The men were honored for theoretical insights into developing the best rules for bidding and for establishing the final price. The resulting improvements in auction formats have proven especially useful in auctioning off goods and services that are difficult to price using traditional methods, such as radio frequencies, the committee said.
Wilson, 83, was cited for theoretical research that explored “the winner’s curse” in auctions of goods that ultimately had the same value to all potential buyers, such as minerals in a specific geographic area. He developed a theory explaining the tendency of successful bidders to place bids lower than their own estimate of the item’s value to themselves or other buyers, because they feared paying too much.
Milgrom, 72, drew the nod for developing a more general theory of auctions involving values that vary between bidders. After analyzing bidding strategies in several popular auctions, he showed the best format to be one in which bidders learn more about each other’s estimated values during bidding.
Auctions are embedded throughout the modern economy. Art houses use them to sell paintings and antiquities. Search engines rely on them to dispose of advertising space. And public authorities offer airport landings slots and mineral rights via auctions.
Global financial markets also operate on their principles.
Asked by reporters about his own use of auctions, Wilson mentioned that he had recently purchased a pair of ski boots on eBay. “It’s something you encounter a lot,” he said.
The prize committee said that Milgrom and Wilson had invented new formats for simultaneously auctioning off many interrelated objects for societal benefit rather than maximal revenue. In 1994, the U.S. government first used their insights to auction off radio frequencies to telecommunications companies.