Nobel Prize 2020 in Economics | UPSC
American duo win Economics Nobel
WHY IN NEWS:
Paul Milgrom, Robert Wilson honoured for their work on auctions that has helped buyers and sellers
SYLLABUS COVERED: GS 1 : Awards
For PRELIMS it is very important to understand this theory . This can be a potential question for Prelims 2021.
For MAINS make separate note on auction theory with your own example . Let us dive in !
NOBEL PRIZE 2020 IN ECONOMICS
- The award caps a week of Nobel Prizes and is technically known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
- Since its establishment in 1969, it has been awarded 51 times and is now widely considered one of the Nobel prizes.
THE AWARD GOES TO
- The discoveries made by Mr. Milgrom, 72, and Mr. Wilson, 83.
- The duo was honoured for improvements to auction theory and inventions of new auction formats.
- Mr. Wilson, a professor at Stanford in the U.S., was spotlighted for developing a theory for auctions with a common value.
- Mr. Wilson’s work showed why rational bidders tend to bid under their own estimate of the worth due to worries over the “winner’s curse” .
- Mr. Milgrom, also at Stanford, then came up with a more general theory of auctions, by analysing bidding strategies in different auction forms.
- The winners will share the prize sum of 10 million Swedish kronor (about $1.1 million or €950,000).
- The Nobel prize, which consists of a gold medal, a diploma and a cheque for 10 million Swedish kronor.
WHAT IS AUCTION THEORY ?
- Essentially, it is about how auctions lead to the discovery of the price of a commodity.
- Auction theory studies how auctions are designed, what rules govern them, how bidders behave and what outcomes are achieved.
- When one thinks of auctions, one typically imagines the auction of a bankrupt person’s property to pay off his creditors.
- Indeed, this is the oldest form of auction.
- But over time, and especially over the last three decades, more and more goods and services have been brought under auction.
NATURE OF AUCTIONS
- The nature of these commodities differs sharply.
- For instance, a bankrupt person’s property is starkly different from the spectrum for radio or telecom use.
- This is also true because the purpose of an auction also differs with the commodity and the entity conducting the auction.
- More often than not, private sellers want to maximise their gains while public authorities may have other goals in mind.
SOURCES : IE
- For instance, when selling telecom spectrum, a government could either think in terms of maximising its revenues or aim at making telecom more affordable to everyone.
- If it wants to maximise revenues, the auction has to be designed one way, but doing so will imply that the company eventually winning the contract will make telecom services costlier .
- The up-side, however, is that the government will get more money in its kitty and can use it whichever way it likes.
- Possibly even subsidise the telecom costs of the poorest.
- On the other hand, if the government’s goal is to enable the broader society to access the benefits of the telecom revolution.
- This allow even the poorest to use the Internet at an affordable rate, it may want to focus more on how best a company can ensure that.
- In fact, before auctions became the norm for limited resources such as radio waves, governments used to allocate them as one would conduct a beauty contest.
- This would involve asking how a company might use the spectrum and assessing which company is best suited to receive the license.
APPROACH AND CHALLENGES
- This approach, however, led to a proliferation of lobbying.(trying to influence a politician or public official).
- But even when a beauty contest approach was replaced with an auction, it mattered how the auction was designed.
- For instance, if spectrum is auctioned at the regional level, national players may not get seamless access to optimum quality of spectrum across the country;
- As a result, they may not bid as aggressively.
- How an auction is designed, therefore, has a tremendous impact not just on the buyers and the sellers but also on the broader society.
KEY VARIABLES IN AUCTION
Three key variables need to be understood while designing an auction.
- Imagine participating in an auction.
- Your bidding behaviour is likely to differ if the rules stipulate open bids as against closed/sealed bids.
- The same applies to single bids versus multiple bids, or whether bids are made one after another or everyone bids at the same time.
- In essence, the question is how does each bidder value an item.
- This is not always easy to ascertain.
- In terms of telecom spectrum, it might be easier to peg the right value for each bidder because most bidders are likely to put the spectrum to the same use.
- This is called the “common” value of an object.
- But this may not be the case with some other commodities, say a painting.
- For instance, which bidder has what information about the object, or even the value another bidder associates with the object.
LET US REVISE
The outcome of an auction (or procurement) depends on three factors —
- The first is the auction’s rules, or format.
- Are the bids open or closed?
- How many times can participants bid in the auction?
- What price does the winner pay – their own bid or the second-highest bid?
- The second factor relates to the auctioned object.
- Does it have a different value for each bidder, or do they value the object in the same way?
- The third factor concerns uncertainty.
WHAT INFORMATION DOES AUCTION THEORY PROVIDE?
- The theory can also show how to design an auction to create as much value as possible.
SOURCES:IE | Nobel Prize 2020 in Economics | UPSC