"Paul, it's me, Wilson. You've won the Nobel Prize! At 2:15 a.m., on the doorstep of Stanford economist Paul Milgrom, another Nobel laureate, Wilson, was ringing the doorbell, "They want to contact you, but they don't have your phone number." ”
Perhaps because of drowsiness, Paul Milgrom paused for a moment before replying, "Oh, me?" Wow, okay..." and asked, "Only I win?" Why not you? ”
Fortunately, the end of the Nobel Prize shared by teachers and students could not be more successful, and this is the fourth time that the two have won a major award together for the results of auction theory.
Without surveillance footage at the door recording this conversation, it's hard to believe that the Kitino Award's approach can be so grounded. Thanks to the two scholars working at Stanford University and living in the same neighborhood of the school, there is a scene of "the Nobel laureate personally announcing the good news to the Nobel laureate".
In addition, Milgrom was the third Student wilson to win the Nobel Prize. In 2012 and 2016, Alvin E. Roth and Bengt Holmstrm won the Nobel Prize in Economics for matching theory and contract theory, respectively, and they were both from Wilson.
It is also an important branch of game theory, and this time, it is finally the turn of auction theory.
In short, auction theory is the study of economics in which the best competitive strategy is sought in auctions, with the goal of improving distribution efficiency.
Compared with the macroeconomic theories that have won the most Nobel Prizes, the four words auction theory may sound much more approachable, but its impact on contemporary economic life is not weak.
Unlike many pure theorists, Wilson and Milgrom personally applied their academic research to the real world.
From the way telecoms buy spectrum in various countries to Google's model of selling ads, the duo's research on auction theory has greatly improved the efficiency of resource allocation in practice. Even those who have not personally bid have benefited from their work in improving the efficiency of the use of public resources.
<h3>One theory, many parties benefit</h3>
In its award speech, the Royal Swedish Academy of Sciences wrote: "Practice has proved that the new form of auction is particularly beneficial to goods and services that are difficult to price according to traditional methods, such as the radio spectrum." ...... As a result, the winners' pioneering research on auctions has benefited buyers, sellers and taxpayers around the world. ”
Indeed, we are in an era when auctions are profoundly impacting society. When its tentacles reach into every corner of economic life, how to design a better auction mechanism to maximize the interests of buyers and sellers is particularly critical.
The first problem to solve is the winner's curse.
In a typical common value auction, the value of the lot is the same for each bidder. Submarine oilfield exploitation rights, radio spectrum, initial public offerings... All fall into this category.
The winner's curse means that the ultimate winner may face two situations: either, his bid exceeds the value of the lot and does not make a loss, or the value of the lot is lower than he expected, resulting in lower returns than expected.
Once bidders become aware of this potential problem, they will depress their bids in order to avoid overpayment, eventually causing the lot to sell below the market price or to be sold at a lower price than the market. In short, there is always one side for the buyer and the seller to lose.
How to avoid this phenomenon of "mutual harm" was a concern at the beginning of the establishment of auction theory. Wilson has focused on this field since the 1960s and is regarded by the industry as the "father of auction design". He explores the "winner curse" in mineral auctions based on a theoretical framework of common values. Wilson's research proves that when information is asymmetrical, the bidder's tendency to undercut the price will be more obvious, and the bidding of those who are at the disadvantage of information will become lower or simply abandon the bid.
Milgrom, after comparing the bidding strategies of British and Dutch auctions, proposed to develop a more inclusive auction theory. His theory takes into account not only common values, but also the private values given by different bidders, and on this basis designs value-added models.
The most well-known auction mechanism is none other than The British auction. Bidders openly shout prices, increase the number of layers, and the highest price will get. The famous Christie's and Sotheby's auction houses use this method of auction.
Source: Official Sotheby's website
Also an open outcry, Dutch-style auctions are bid from high to low, characterized by short time consumption. This method of auction was first adopted by Dutch flower market merchants in the 17th century, with the intention of allowing fresh flowers to quickly enter the distribution process.
Source: Royal Flora Holland official website
If bidders learn each other's valuations during the bidding process, they will revise their bids for lots accordingly, which is called "correlation evaluation". In this case, the seller will get the highest profit. This, Milgrom argues, is the incentive effect that exists in auctions, prompting sellers to collect and share authentic and effective information with bidders.
In short, public information helps prevent losses and increase sellers' revenues. Later, this was confirmed in experiments by other economists.
On the basis of in-depth study of the achievements of previous scholars, the two not only made achievements in the theoretical field, but also helped to improve the auction mechanism in reality.
<h3>Classic case: wireless spectrum auction</h3>
The two Nobel laureates are best known for their achievements in the simultaneous Multiple Round Auction (SMRA), which has influenced the world and is still in use today, which kicked off the history of global spectrum auctions.
Between 1993 and 1994, Milgrom and Wilson led the design of the auction for the Federal Telecommunications Commission (FCC), and the first auction after the reform helped the U.S. government generate $617 million in revenue.
Until then, the allocation of spectrum resources for cell phones and other communications equipment had been a chore — by the early 1990s, telecom operators had to lobby heavily to obtain radio-frequency spectrum licenses from the U.S. government, a way that both sides felt was inefficient.
The FCC has also sold some spectrum resources by lottery, which has caused the problem that the winning lottery is random, which in turn leads to the fact that the companies willing to bid the highest for licenses often fail to obtain licenses, and the government's profit space is wasted.
In 1993, then-U.S. President Bill Clinton authorized the FCC to hold spectrum license auctions, but new problems arose, and it was difficult for a national telecommunications company to guarantee that it would be able to sell the same frequency in every state.
In other words, spectrum sales are interdependent. If the bands are simply auctioned by region, the valuation of spectrum by a national telecommunications company in one region depends on whether they can buy the same band elsewhere.
For example, whether a telecom operator is willing to pay a high price for a California license for a certain frequency band depends on whether they can also obtain a license for that band in New Mexico.
If, according to the conventional auction law of the time, each license was auctioned separately in order, the uncertainty of winning the second auction would weigh down the bid for the first auction. As a result, the government cannot obtain higher profits, telecom companies can not efficiently develop their own communications, and the patchwork of communication coverage is also inconvenient for users.
Therefore, the use of radio spectrum for remote communication has led to the design of the auction mechanism not only considering a single lot, but considering multiple parts and batches of goods for sale, which also arises when auctioning energy and transportation resources.
In this case, Milgrom, Wilson and other experts were commissioned by the U.S. government to design the rules for the first auction. Their goal is to help governments achieve the highest expected revenues while increasing efficiency and rationalizing the allocation of scarce resources.
To this end, they designed the "Simultaneous Multi-Round Auction" (hereinafter referred to as SMRA) scheme.
In the first round of bidding, all bidders quote separately for all licenses they intend to purchase, but they do not make it public. At the end of the first round, only the highest offer received for each license is published, and the starting price for the second round is set accordingly. Each round of the high price is retained until it is replaced by a higher quote, and so on.
This allows telcos to bid for multiple licenses at the same time and allow for duplicate bids.
In addition, the simultaneous conduct of auctions prevents buyers from colluding to drive down the purchase price, which maximizes the government's profits, which can be used for public services such as health care and education.
In July 1994, the FCC held its first radio spectrum license auction, which made more than $600 million in profits. Since then, many governments such as the United Kingdom, Canada, and Austria have also adopted the SMRA scheme, increasingly using auctions to allocate public resources, in addition to radio spectrum, there are oil exploitation rights, power resources, carbon emissions trading programs, etc.
Public data shows that as of 2014, the auction scheme inspired by "auction theory" has "sucked" $200 billion for European and American governments.
In the current high-profile 5G spectrum auction, the "auction theory" has helped governments to obtain huge profits, and the major economies in Europe and the United States have used this theory to grasp it.
Not long ago, France earned 1.386 billion euros in revenue by auctioning 5G spectrum. Together with the 50MHz spectrum previously allocated to 4 operators at a fixed price of 350 million euros, France eventually earned 2.786 billion euros in revenue through 5G spectrum of 310MHz.
The U.S. FCC chairman also publicly stated in August that the agency is expected to receive nearly $4.6 billion from the auction of 5G spectrum from operators. The German government previously estimated that the 5G spectrum auction would bring in 4 billion to 5 billion euros in revenue for the government.
<h3>ad? Online shopping? At its core, it's all auction theory</h3>
Entering the 21st century, the research of Milgrom and Wilson has helped this ancient way of trading continue to rejuvenate in the digital age.
Let me give you an example. In 2019, Google's advertising revenue reached $134.811 billion, accounting for 83.87%; Facebook's advertising revenue accounted for a staggering 98.53%, and the way they sold advertising space was auctioned.
An example of Google's ad auction method. Image source: Google AdSense service
Watching Google and Facebook suck up money like crazy, more and more Internet companies have taken the digital advertising business seriously. And they generally follow the industry giants, choosing to price the ad placement through instant bidding, and get the highest revenue from advertisers.
If the huge advertising costs earned by auctions for Internet giants are not real enough to touch, there is another kind of auction that ordinary people "one-click directly" - auction services on e-commerce websites.
After winning the award, Wilson admitted to reporters that as an expert in the field, he had hardly participated in the auction, and the only example he could think of was that he and his wife had won two pairs of ski boots on eBay.
Although it is not known whether Nobel laureates have used their own doctrine in online shopping, we may wish to use eBay's unique auction mechanism to explain how ordinary people will meet auction theory in their lives.
The eBay auction has the following features.
eBay auctions only accept bids for a specific period of time. Sellers can set the starting price and closing time of the item, and buyers can bid publicly within 1, 3, 5, 7 or 10 days. Therefore, there is a kind of "rush auction" play among auction veterans, everyone is stationary in the early stage, waiting until the last few minutes to start bidding quickly, so as to avoid inflating the price too high in the early stage.
Everyone has access to eBay's automated bidding system. This system is useful when participating in "snap shots". Users can enter a maximum price they are willing to pay a few minutes before the bidding closes. The highest bidder wins, and he pays a slightly higher amount than the second-place bid.
The highest bid currently received for the Lot is confidential. As a result, users have no way of knowing how much they can bid for just enough to get the product.
In addition, the large number of similar items may complicate the bidding model. In short, an eBay bid is a mix of different strategies, expectations, and possibilities.
Today, eBay's core business in the U.S. has shifted to priced merchandise sales, but online auctions are still blue oceans in many places. Alibaba Group, which Chinese consumers are more familiar with, entered the market in 2012 and officially launched "Alibaba Auction", which includes judicial auctions, asset auctions, real estate auctions and luxury goods auctions.
In recent years, other e-commerce platforms have also found this potential market: in 2016, JD.com increased its auction channel; in 2020, 58.com also increased its auction business.
According to the latest data, the number of users in Alibaba Auction alone has exceeded 200 million. The market growth rate of Ali auction is considerable, compared with the transaction scale of only 60 billion to 80 billion yuan in 2015, the annual transaction volume of Ali auction in 2018 reached more than 500 billion yuan. As the development of the industry becomes more and more standardized, ordinary consumers are expected to participate in online bidding while witnessing it open a new economic growth valve.
According to auction theory, the bidding method used by most e-commerce websites is a variant of The second-price sealed auction.
William Vickrey, a 1996 Nobel laureate, argued that under this mechanism, the best strategy for bidders is to bid honestly according to their own valuation of the lot; this mechanism is also known as the "Vickery Auction".
The basic types of auctions also include The first-price sealed auction, which is often used in tenders for construction projects, as well as the British and Dutch auctions mentioned above.
These four types of auctions and their variants have their own advantages and disadvantages for both buyers and sellers. Many factors such as the number of bidders and the degree of information transparency may affect the final profit of the seller and the profit of the winning bidder, which requires the seller and the buyer to pay attention to the adjustment of strategy in the transaction.
If we learn a little more about auction theory, we may be able to "pick up leaks" in similar auctions.
<h3>After the Nobel Prize, continue to ride the wind and waves</h3>
Paul Klemperer, an Oxford university professor who is also an expert in auction theory, said, "Auction theory is an ideal subject for experimental research in economics, as it is for fruit flies for biology. ”
In short, the auction itself is simple in structure, but in practice there are many complications. This makes it ideal for testing a variety of topics of competitive strategy and game theory.
Compared with the auction itself, which is more than 2,500 years old, the auction theory that sprouted in the 1960s is much younger. But it has moved from academics to reality, benefiting every auction application scenario.
For many years, Wilson and Milgrom, faculty and students and their research on auction theory, have been popular candidates for the Nobel Prize in Economics. People who pay attention to the field of microeconomics predict every year, regret every year, and finally witness the two people receiving the loudest applause in the ups and downs of 2020.
Although their achievements do not necessarily require an extra laurel to argue, the Nobel Committee's choice at this time is intriguing.
At present, the world is mired in the mire of economic downturn, and it is still unknown when it will be able to get out of the haze. When many of the laws that used to depend on survival are broken, perhaps people need more specific and subtle guidance.
The results of Wilson and Milgrom's research prove that when economic theories move out of the ivory tower and are combined with practice, they have the ability to reinvent people's imaginations of efficiency and convenience.
Ubiquitous auctions are being transformed by the far-reaching theory of auction. When the dust settles on the Nobel Prize, its light will continue to shine.