Economics is a branch of social science that deals with the manner in which goods and services are produced, distributed, consumed, and managed. This is an integral part of society with regard to improving the standards of living. The effectiveness of economic theories in achieving this feat depends on the priorities of society. The political economy in any part of the world is often influenced by the things people consider the most important. Research studies have shown that economics can also make things worse in society if people make uninformed decisions in the face of scarcity (Bichler 19). This explains the crucial role played by economists, who specialize in the study of how people use scarce and crucial resources, such as land and labor, to produce goods and services for sustainable growth. Over the years, economists have made considerable contribution towards the development of economic thought and discourse. Their efforts have been rewarded in various ways, with the Nobel Memorial Prize in Economic Sciences being one of the most notable ones. Since 1969, the Nobel Foundation has awarded various individuals with this award for their outstanding contributions in the field of economics. Robert Wilson is the latest recipient of this award in 2020 alongside Paul Milgrom with whom they worked together in developing new auction formats.
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The Nobel Memorial Prize in Economics plays a crucial role of acknowledging the efforts of economists. Born on May 16, 1937 in Geneva, Nebraska, Robert Butler Wilson is an American economist who has made notable contributions in the fields of economics and management science (Peters 29). In 2020, he was jointly awarded the prestigious Nobel Memorial Prize in Economic Sciences for making improvements to the auction theory. Wilson has influenced the development of economic thought through lectures, books and hundreds of articles published in various professional journals. As an expert on game theory, he has helped many multinational corporations and businesses in the areas of settlement negotiations and wage bargaining (Peters 36). He has also conducted extensive research on nonlinear pricing. It plays a crucial role in determining the ability of an economy to sustain itself and grow. Wilson has contributed to the advancement of this concept through the development of market and auction designs, as well as competitive negotiation and bidding strategies (Peters 40). His studies have helped oil, communication, and energy companies to develop effective pricing schemes that also integrate with the latest technologies.
The utility industry across the world has greatly benefited from Wilson’s innovations. It relies much on the ideas he has developed to help businesses in determining the right price for priority services. Most of his earliest research work focused on the need to analyze and comprehend the behavior of bidders in auctions. The main motivation for conducting such studies was the fact that goods sold through auctions have common values albeit in varying degrees (Milgrom 26). Initially, bidders tend to experience uncertainties in the value of such goods because their pricing is mainly determined by the prevailing market forces. For individual bidders, the value of goods sold through auction is influenced by factors such as taste, desires, and goals (Milgrom 26). In the case of entities, the influencing factors include technological demands, availability of storage capacity, as well as the size and nature of the customer base.
According to Wilson, bidders in auctions selling goods with a common value tend to bid with prices lower than their estimated value for an item. This strategy is usually informed by the fear of one falling victim to a situation where the money paid for an item is way above its value. The price paid for an item tends to be lower when bidders have little or no information with regard to establishing the real value of goods (Wilson and Alan 6). This explains why in auctions, the lesser information bidders have about an item the lower the bids get and vice versa. In some cases, interested bidders choose not to participate in an auction when they are aware that the information one has regarding the items available is not adequate. For an auction to generate good income for the seller, Wilson and Milgrom established that the bidder should have as much information as possible (Milgrom 50). In response to this realization, they decided to engage their theoretical perceptiveness to create new and more effective auction formats that can apply in selling mixed-value goods at the same time.
Simultaneous Multiple Round Auction (SMRA)
Simultaneous Multiple Round Auction (SMRA) is one of Wilson’s most notable innovations. This format was created in the early 1990s for the Federal Communications Commission following their prolonged struggles with allocation of radio frequency bands across various geographic areas. SMRA format allows bidders in an auction to bid on and win multiple items simultaneously. It helps an auctioneer to make the process as profitable as possible, and at the same time allowing bidders to get good value for their money in a highly competitive environment (Milgrom 115). This is different from the traditional first-price sealed-bid (FPSB), where all bidders are allowed to submit their sealed bids simultaneously and the highest price gets to win. With this bidding format, a bidder can only submit one bid at a time and does not have the benefit of adjusting his or her bid since the submissions of the other participants are often concealed.
One of the characteristic features of FPSB is the fact that bidders identify with their unique valuations of the items on sale. This means that this model allows for competitive prices for items on sale compared to SMRA. With SMRA, the monetary valuation of items on auction can be too low if the demand lowers (Wilson and Alan 14). Additionally, low prices for items can also be necessitated by the problem of exposing bids by other participants. Rational bidders that apply this format are often limited because they can never bid for an item above its monetary value as it can easily lead them to lose the net value (Milgrom 129). For a bidder to win using this format, one has to submit a bid lower than their valuation of an item and hope the bids by other participants work in his or her favor.
The Federal Communications Commission used SMRA for the first time in 1994, where it successfully auctioned radio frequencies across multiple geographical regions. Thereafter, the format was adopted by several other countries across the world. SMRA applies a number of rules that ideally are an extension of the English auction where one item is sold at a time. First, all items are auctioned at the same time with each of them having an associated price, thus allowing bidders to bid for many items as they wish (Wilson and Alan 38). Auctioning happens in rounds that run for a specific period, in which various bids are submitted. At the end of each round, the auctioneer often announces the winning bids, which are usually the highest offer submitted on each item. The auctioneer has the right to decide on the amount of information revealed with regard to the bids submitted by other bidders.
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SMRA uses activity rules that require a bidder to be fully engaged from the start of the auction process until the end when all items have been sold. One of the challenges associated with this format is the fact that bidders are easily tempted to suppress their demand at the begging with the aim of learning the pricing curve (Milgrom 166). In order to address this challenge, Wilson found the need to improve the format of auctioning, where bidders are not allowed to bid on more items when the process is at an advanced stage. This makes the auction to make as much profit as possible because all interested bidders will have to be active from the start if they want to be part of the whole process.
To date, activity rules are one of the greatest additions to the concept of auctioning. One of the main factors that influenced the decision to award Wilson and Milgrom with the Nobel Prize is the practicality of their theory. According to psychologists, the value of a theory lies in its emphasis on theoretical contributions and the practicability of the ideas it articulates (Milgrom 180). The two economists have made reasonable improvements to the auction theory and even went ahead to develop new auction formats. Their innovations have improved the efficiency of the auction process due to their ease of integration with the latest technology.
The Game Theory
The first person to use this theory in economics was William Vickery. The Nobel Laureate in 1996 focused on explaining the way the value an individual bidder ascribes to an item in auction does not influence the price of the same commodity by a different participant. Vickery described this phenomenon as “private values” (Peters 60). On his part, Robert Wilson sought to improve on this concept by developing his own framework called “common values.” He explained this model as a situation where people submit different bids in an attempt to win an object they have ascribed a common value but are uncertain of its worth. The efforts of Robert Wilson in the application of game theory to understand and explain economic issues are highly visible.
As evidenced in the impact that the auction theory has made across the world, Wilson’s seminal status in the field of economics is fully deserved as he continues to contribute towards the development of economic thought. His biggest influence as an economist came from his mentor Professor Howard Raiffa while he was at Harvard Business School (Wilson and Alan 100). Wilson was highly intrigued by the work Howard was doing on the decision theory. His major focus was to understand the manner in which a group of people can share risk in an effective manner (Peters 92). This further increased Wilson’s curiosity with regard to the various ways in which the game theory could be integrated with the auction process for enhanced efficiency. The game theory refers to a study of the way various economic agents interact to influence choices in line with their preferences.
In economics, the theory applies as a tool for analyzing competition, bargaining, auctions, and mechanical designs among other economic phenomena. The contemporary business environment is highly competitive, thus the need for businesses to use effective marketing strategies to grow their customer base (Milgrom 120). Organizations also apply the game theory in predicting the probable outcomes if they were to involve themselves in activities such as collusion and fixing of prices for certain commodities. This requires a highly effective organizational structure because any loopholes can easily lead into a market crisis. Conducting a thorough market analysis often gives a business a competitive advantage in a market because it has an easy time connecting with consumers. People prefer buying from businesses they understand and meet their needs in a satisfactory manner.
When Wilson started to work on the possibilities of introducing multi-unit auctions, not many could comprehend the contribution that the theory would make in advancing the economic thought. He had a vision that was received with a lot of skepticism, but the integral role played by the theory in the curriculum for economic students across the world is enough evidence that Wilson has truly influenced the development of economic thought (Peters 102). In 2017, Wilson was the recipient of the GME Group-MSRI prize in Innovative Quantitative Applications for the contributions he made in pioneering the use of game theory in economics. He has made it easy for people to comprehend the manner in which demand and supply are interdependent in terms of influencing the price of commodities (Peters 117). The reality that market prices are often influenced by other factors beyond demand and supply pushed Wilson to introduce new formats in the auction process. He believes that in every market, there are people who are always bidding for goods according to the monetary value they set for them rather than on the demand and supply basis.
The dynamics of the auction market are more complicated and rewarding than most people may perceive it. For example, the introduction of activity rules in SMR helped to enhance the effectiveness of the auction process, as well as increase profitability for the auctioneer and enable bidders to get value for their money (Bichler 42). This helped in erasing the concept of “snake in the grass” from the bidding process, as it was working to the disadvantage of bidders that were bold enough to take risks from the start. This concept entailed a bidding strategy where some bidders would fail to bid for items early on and wait to jump in towards the end having already studied the bids of other participants.
Real world applications of Wilson’s work in the advancement of economic thought focuses on comprehending the manner in which economic changes unfurl when information is not shared across an equal platform. To address this challenge, he came up with auction formats that allowed for the necessary cooperation of stakeholders involved in respective environments. For example, one of the challenges that are characteristic of auctions is what economists refer to as “winner’s curse.” It refers to the notion that in an auction, the only way someone can win is by bidding more for an item than its real worth (Peters 169). This means that a bidder who overestimates the value of an item ends up the eventual winner. In a bid to tackle this challenge, Wilson had to engage a number of economic theories and his experience as a consultant with the Department of Interior.
Wilson has also applied his theories to improve the efficiency of pricing in the electric market. In the late 1990s, the California Electricity Market was privatized. This move resulted in a crisis that was characterized by a shortage of electric supply, large-scale blackouts, and high electricity prices. To address this challenge, Wilson used his theories on non-linear pricing through quantity discount (Bichler 100). This means that the more electricity supply one would buy the lower the price per unit they will be charged. Wilson came up with the model of priority service pricing as a way of cautioning people from encountering the same challenge again (Milgrom 208). This concept entails a situation where a customer pays for the amount of electric supply they need in advance, thus ensuring that there is no room for outages occasioned by changes in pricing.
Wilson has also contributed to the advancement of economic thought through his students, whom he has mentored to become leading economists across the world. One of Wilson’s students who have had a notable impact in the field of economics is Bengt Holmstrom, a Nobel Prize winner in 2016 and an economics professor at the Massachusetts Institute of Technology. Another influential economist taught by Wilson is Alvin Roth, the recipient of the 2012 Nobel Prize in Economic Sciences and an economics professor at Stanford University. The success Wilson has achieved with his students over the years sets him apart from the rest of his peers, as their continued influence in the economics sector boosts his reputation and legendary status. One of the common things that all his former students say about him is his visionary nature and generosity with time. Wilson does not have any trouble sacrificing his personal time to help students who show great passion and dedication towards the advancement of economic thought.
The Nobel Memorial Prize in Economics is one of the factors that have influenced the advancement of economic thought for more than five decades. In 2020, the Nobel committee chose to award its economic prize to two theorists one of whom was Robert Wilson. The theoretical advances that Wilson made to the game theory coupled with developing new auction formats truly deserve the prize. One of the notable insights of Wilson’s efforts in developing economic thought with regard to auctioning is the need for bidders to avoid falling victim to the “winner’s curse.” Over the years, his model has grown into a platform for spectrum allocation across the world. This has resulted in auctioning becoming a highly profitable venture. Wilson has proven to the world that economists are not just about developing theories but can also make things happen. Together with Milgrom, he developed a theory to explain why a traditional way of selling things such as auctioning still works. He further used the same theory to make auctions work better by creating new formats. Indeed, Robert Wilson has made an immeasurable contribution to the development of economic theory.
Bichler, Martin. Market Design. Cambridge University Press, 2017.
Milgrom, Paul. Discovering Prices: Auction Design in Markets with Complex Constraints. Columbia University Press, 2017.
Peters, Hans. Game Theory: A Multi-Leveled Approach. Springer, 2015.
Wilson, David, and Alan Kirman. Complexity and Evolution: Toward a New Synthesis for Economics. MIT Press, 2016.
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