Understanding The New Auction Theory And New Auction Formats By Nobel Prize Winners, 2020

Before starting the article let's go with a quick introduction of Paul R. Milgrom And Robert B. Wilson.

Paul R. Milgrom: Paul Milgrom is the Shirley and Leonard Ely professor of Humanities and Sciences in the Department of Economics at Stanford University and professor, by courtesy, at both the Department of Management Science and Engineering and the Graduate School of Business and economic advisor at Algorand Blockchain project {Reference1,2}. 

Robert B. Wilson: He is an American, and the Adams Distinguished Professor of Management, Emeritus at Stanford University. He jointly awarded the 2020 Nobel Memorial Prize in Economic Sciences, together with his Stanford colleague and former student Paul R. Milgrom {Reference}.

Auction is nothing but the selling of assets or valuable items to the highest bidder and you won't believe auction is everywhere, for example- Companies by spectrum and electricity through actions so we as an end-user are directly or indirectly affected by auctions because our mobile bill and electricity bill increase or decrease according to the company bids for that auction.

Hence every asset in the world can't follow a single auction theory and format we follow multiple auction theories and formats for example till now we are using 'simultaneous multiple round auction' for mobile spectrum auction but it has also some flaws and all the traditional auction theories and formats aren't equally treat all participants of the auctions where sometimes bidder makes profit by giving seller a loss and sometimes seller makes profit by giving bidder a loss.

So in this article, we will discuss new auction theory and new auction formats by Nobel prize winners Paul R. Milgrom and Robert B. Wilson in brief {Reference}.

All the resources in this world are limited, and good auction theory can help to manage these resources more efficiently, for example, if you take the example of electricity auction then the production company not only sells electricity to other company through auction but also buy coal for electricity production through auction so a good auction can help to manage coal resource efficiently {Reference}.

Auctions are not limited to the physical world but nowadays google also does an auction to sell keywords and ads in his platform and we can't use the same auction theories and format everywhere so here we need improved auction theories and new formats by Paul R. Milgrom And Robert B. Wilson {Reference}.

Before we go further, let me tell you some important terms.

Common value- When you buy a valuable item through an auction and sell it in the future then it is called common value for example if you buy a painting then you sell it to someone else in the future at a price X then X is its common value which may be higher or lower than the price you brought.

Private value- Private value is the importance of the item to the buyer, for example- if your dream is to buy that painting then maybe for you the private value is high but if a person buying that painting just to resell and he don't have any sentimental issue with the painting then the private value of the painting for this person is low.

Winner's curse- During an auction, you don't have any scale to measure the profit and sometimes you bid and win, but the value of items you get is lesser than your bidding price which is called winner's curse.

When a person bids in an auction, it gets influenced by the private and common values, but an auction differs in two main respects: format and information.

Which means an auction format defined the rules of the auction where information defines the value of an auctioned object for example if you know a painting has a $100 common value as it not so famous painting so you will not bid more than $100 but if you have no information about it, then you may overbid and fall into winner's curse.

 Milgrom studied different situations and analyzed, modified, synthesized, and generalized all situations and ranked different auction formats in terms of their expected revenue.

Auction is no more limited to a few items, but now auction is used to buy electricity, mobile spectrum, digital space, ads, etc. So we can't rely on "standard” auction formats. By identifying and analyzing some salient issues in auctions with interrelated objects, Milgrom and Wilson invented several valuable new auction formats and designs mentioned below.

Single-Object Auctions: This is referred to the auction of one valuable item like painting, statue, artwork, house, etc.

Multi-Object Auctions: This is the auction of multiple objects in a single auction like multiple bus routes, radiofrequency, etc.

Share Auctions: This is the subsection that comes under multi-object auction where two bidders understand the value of objects and take part in the auction.

Auctioning Interrelated Objects: This is the auction where an object allocates or allows a company to sit on an auction if it is related to the object for example Govt allows telecommunication to take part in radio frequency auction.

Multiple Round Auctions: If an auction has multiple rounds, then this format induce every bidder to make a credible attempt at placing the highest bid for at least some object in every round and it has more 3 subformats 1. Simultaneous Multiple Round Auctions, 2. Combinatorial Clock Auctions, 3. Incentive Auctions.

Other Prominent Auctions: This is the auction format for several influential designs for the sale of multiple items and it has 2 subformats 1. Product-Mix Auctions, 2. Position Auctions.

For the detailed framework of all above auction format and theory, please read the main paper here 

If you read the main paper, then you could find that the new auction theory and formats are created to protect everyone who takes part in the auction and ‌to benefit the society, and if you read the introduction of Paul R. Milgrom where I mentioned that he is an economic adviser of a blockchain project Algorand which is a clear message that blockchain economy is the future.