“Going once, going twice and sold.”
A legitimate auction can raise large volumes of money for the best of a Parisian artist’s work to a cricket player up for the Indian Premier League. According to the US National Auctioneers Association, the gross revenue of the auction industry for 2008 was approximately $268.4 billion that touched $394 billion by 2017.
The industry that worked mainly on instinct, value of the property and the capacity of a bidder involved, witnessed a radical change with the Auction theory introduced by American economists- Paul Milgrom and Robert Wilson.
The duo, professors of Stanford University, founded methods to help a researcher in understanding the outcomes of different rules for bidding and final prices, the auction format. They involved the behavioural process of the bidder while decoding strategies and the influence of information.
In the due time, Wilson and Milgrom invented new formats to auction many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue.
Robert Wilson’s theory for auction of objects with a value that is uncertain beforehand, buy is the same for everyone in the end and Milgrom’s theory about common values and private values that vary from bidder to bidder, set the stepping stones to their findings.
Wilson by examining the future value of radio frequencies or the volume of minerals in a particular area showed why rational bidders tend to place bids below their own best estimate of the common value: they are worried about the winner’s curse – that is, about paying too much and losing out.
Paul Milgrom researched the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding.
It was only in 1994, that the US authorities used their auction format for the first time to sell radio frequencies to telecom operators. Since then, their formats became a global trademark for complex auctions.
It is only in 2020, that the Royal Swedish Academy of Sciences decided to award Paul Milgrom and Robert Wilson with the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.