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Paul Milgrom, Bob Wilson win Nobel prize in Economics

Paul Milgrom, Bob Wilson win Nobel prize in Economics

October 14, 2020

MS&E offers our congratulations to Paul Milgrom on winning the Nobel prize in Economics with Bob Wilson!


Robert Wilson, left, and Paul Milgrom were awarded the 2020 Nobel Memorial Prize in Economic Sciences. (Image credit: Andrew Brodhead)

 

This prize was awarded for "improvements to auction theory and inventions of new auction formats." 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, in both the Department of Management Science and Engineering and the Graduate School of Business. Needless to say, we in MS&E are enormously proud to call him our colleague.

Milgrom has made numerous path-breaking contributions to auction theory, starting in the late 70's. He is well-known for developing theories that are both elegant and practically relevant. A seminal result in auction theory is that when bidders values (for a single item) are independent, an ascending English auction (where the price continuously rises and bidders fall off) and a first price auction yield the same outcomes. Milgrom and Robert Weber studied more realistic situations, in which bidders have private information but are still uncertain about the value being auctioned. The key insight is that transparency in the bidding process improves the sellers' revenue. So the auctioneer should actually prefer an ascending auction. Transparency (also referred to as the "linkage principle") also helps bidders to update their beliefs and avoid the winner's curse.

Paul Milgrom. Image courtesy of Stanford Graduate School of Business.

In 1993, Milgrom and Wilson, together with Preston Mcafee and John McMillan, engineered a new auction for the Federal Communications Commission to sell spectrum licenses. Designing an auction for this purpose is much more involved since bidders' preferences for licenses include both complementarities and substitutes. Milgrom's earlier theory led to the adoption of some form of an ascending auction. One innovation is the use of multiple rounds of bidding, where in each round bidders could bid on different packages (combinatorial bidding). Another ingenious invention is an "activity-rule" to ensure active bidding between rounds, which has become standard now in many types of auctions. More recently Milgrom, with Kevin Leyton Brown, and Ilya Segal designed a two-sided incentive auction to reallocate radio frequencies from TV broadcast to wireless broadband uses. These auctions raised billions of dollars in revenue. Intellectually, in addition to auction theory, this work involves novel complexities including deciding on property rights, what to sell, and computational challenges.

Milgrom has made seminal contributions to numerous areas in economic theory such as financial and securities markets, organizational economics, labor markets, and game theory, and his citation count is over 100K. Another milestone result by David Kreps, Paul Milgrom, John Roberts and Robert Wilson would be particularly interesting to an MS&E audience. Game theory solutions concepts had long predicted that players will not cooperate in the finite repeated prisoner's dilemma game. The "gang of four" showed that cooperation can actually arise when one player commits to the tit-for-tat strategy since the other player will also use a similar strategy to build her reputation.

In addition, Paul Milgrom is one of the founders of the area of market design (the engineering of marketplaces), which has greatly influenced many of us at MS&E.

It is worth mentioning that Bob Wilson also has a long history in Operations Research at Stanford, beginning with forming the PhD program and advising some well-known graduates of this program, including Al Roth and David Kreps. Wilson was the founder of approaching economic theory as engineering, which is one of the cornerstones of our department.

For more detail on this Nobel prize-winning work, see this Stanford News article.