This year’s Nobel Prize in Economics goes to Paul R. Milgrom and Robert B. Wilson for their auction research, it was announced on Monday. Both researched which auctions work best and used that knowledge to design new auctions. Why is this research so relevant and does it deserve a Nobel Prize? We asked Pieter Gautier, Professor of Economics at the Institute for General Economics at VU University of Amsterdam.
The Nobel Prize winners examined which auctions work best in different situations and developed new models for them. Their findings were applied in high-frequency auctions and government bonds.
What makes the research of Milgrom and Wilson, winners of this year’s Nobel Prize in Economics, so special?
“A lot was already known about auctions. Milgrom and Wilson have also dealt with auctions of products whose value was sometimes uncertain. and when you’re designing an auction, you need to take this into account. Milgrom and Wilson showed how you can do that. “
Why is the research of the Nobel Prize winners also socially relevant?
“A safe is a great way to find out what buyers are willing to pay for a product or service. After all, one bidder competes with other bidders and the one with the highest rating wins the product. When it comes to offers, wins the alternative is that the best lobbyists win, and that is much less efficient. Milgrom and Wilson’s research also shows how the government can siphon monopoly profits through smart auctions.
What are examples of auctions that the Dutch encounter in everyday life?
“Buying a house is a good example. When you bid on a house, take into account what appeals to you personally about the house as well as the market valuation, as you will have to sell the house later. Wilson warned against the so-called” Winner’s Curse “: On average, buyers appreciate the value of a home, but the winner is not the average bidder, the winner has likely overestimated the value. This problem is greater at auctions where you bid and put an envelope, because you cannot learn from the other bidders. “
Much of the auctions are now taking place online. How do you see the results of the Nobel Prize winners here?
“The winners didn’t do much research themselves, but they can show that when sellers can decide how to sell a product – through a fixed price, negotiation, or auction – and buyers can choose which seller to go to those auctions are supposed to be optimal sales mechanisms. be.”
In the coming period, states or private parties may have to bid for corona vaccine rights. How do Milgrom and Wilson’s models relate to this?
“”Both Milgrom and Roberts have made many contributions to market design. You weren’t directly involved in the vaccine market, but Susan Athey, who did her PhD at Milgrom. A vaccine is very expensive to develop, but typically only one in ten is successful. To incentivize companies to invest in them, it is important that countries commit to purchasing these vaccines in advance and diversify by purchasing multiple vaccines at once. “