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Paul R. Milgrom and Robert B. Wilson have been awarded the Nobel Prize in Economics in 2020. Both are Americans and professors of Stanford University. They won the Nobel Prize for designing mathematical models that promote improvements in the auction theory and for inventing new auction formats. The award comes with a 10 million-krona (850,000 UK pound sterling) cash prize and a gold medal. This award is formally known as the Sveriges Rinksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Auction theory is a part of the game theory

The game theory was fully developed in the late 1970s and the early 1980s. John Forbes Nash won the Nobel Prize in economics in 1994 for his contribution to the game theory. The key to the game theory is that one player’s pay off is contingent on the strategy implemented by the other player. The game identifies the players’ identities, preferences and available strategies and evaluates how these strategies affect the outcome. In short, the game theory is applicable in any set of circumstances that has a result dependent on the actions of two or more decision makers (players). The equilibrium will reach at the point in a game where both players have made their decisions and an outcome is reached.

Importance of the theory

Many economists consider that the game theory brought about a revolution in economics. It has addressed crucial problems in prior mathematical models. For example, neoclassical economics cannot interpret the entrepreneurs’ anticipation about their behaviour in the market. It also could not handle imperfect competition. Game theory turned attention away from steady-state equilibrium - towards the market process.

Works of Milgrom and Wilson came to prominence in the UK in the early part of the century when the government, with the support of Oxford academic Paul Klemperer, was credited with extracting one of the largest sums obtained by any country from the big phone providers following the auction of a new mobile phone spectrum. The Academy reportedly said that the auction theory developed by Milgrom and Wilson helped new formats that are now used to sell such diverse goods and services such as finishing quotas, airport landing slots and electricity allowances.

Understanding auction pricing is difficult for the common man

It is said that people participate in auction purchasing. But in a higher level, that is, when auction is related to very big amounts, it is difficult to understand how the ultimate price is discovered. So, understanding how auction formats will influence the price is difficult. This is because bidders behave strategically, based on both the information they have and on what they believe other bidders know. The prize committee reportedly said the laureates’ work had been of great benefit to society, allowing regulators and governments around the world not only to maximize revenues or procure at the lowest cost but also to put activities into the hands of agents best placed to manage them.