Paul Milgrom

Paul Milgromis an American economist who, with Robert Wilson, was awarded the 2020 Nobel Prize for Economics (the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) for his contributions to the theory of auctions and for his invention of new auction formats, or rules of operation, for goods and services that could not be efficiently sold in more traditional types of auction. Since the 1990s Wilson and Milgrom’s theoretical and practical work has profited both auction buyers and sellers and enabled governments to allocate increasingly numerous and complex public assets—including radio and broadband frequencies, electricity, airport landing slots, and natural resources—to ensure their efficient use and to maximize their benefits to society.

After graduating from the University of Michigan with an A.B. degree in mathematics (1970), Milgrom studied at Stanford University, where he received an M.S. in statistics (1978) and a Ph.D. in business (1979). He taught at Northwestern University’s Kellogg Graduate School of Management (1979–83), at Yale University (1982–87), and at Stanford (1987– ), where he served as professor of economics and director of the Stanford Institute for Theoretical Economics (1989–91). In 1993 he was appointed Shirley and Leonard Ely Professor of Humanities and Sciences at Stanford.

The work for which Milgrom was awarded the Nobel Prize included the development of theoretical studies by the Canadian-born American economist William Vickrey, now recognized as the founder of auction theory and himself a recipient of the Nobel Prize for Economics in 1996, and Robert Wilson, Milgrom’s former teacher (at Stanford) and eventual collaborator. In the 1960s Vickrey had analyzed the behaviour of rational bidders in the special case of auctions in which the items to be sold have only private values—that is, monetary values that are mutually independent and variable among bidders because they reflect combinations of factors unique to each bidder. In the case of individuals, such factors might include the bidder’s desires, goals, and tastes; in the case of corporations or organizations, they might include storage capacity, customer base, and available technology. Vickrey found, among other things, that two traditional auction formats, called the “English” and the “Dutch” (the former involving low initial prices and ever-increasing bids, the latter involving high initial prices that are successively lowered by the auctioneer until a bidder agrees to buy the item), yield the same revenue for the seller in exclusively private-value auctions. Wilson, in the 1960s and ’70s, had analyzed the behaviour of rational bidders in another special case, that of auctions in which the items to be sold have only common values, which are initially uncertain—or uncertain to varying degrees—among bidders but eventually the same for all because they are ultimately determined by market forces. Wilson found, among other things, that bidders in entirely common-value auctions will bid lower than their best estimate of the item’s value for fear of falling victim to the “winner’s curse”—the situation in which the bidder unwittingly pays more for an item than what its common value turns out to be. Thus, the final price of the item will be lower than it would be if bidders had more information relevant to determining the item’s common value. In cases in which some bidders have more information than others, those who have less (and are aware that they have less) will bid even lower or choose not to participate.

Milgrom’s theoretical advance was to develop an account of the behaviour of rational bidders in the more complex and realistic case of auctions in which the values of the items to be sold have both common and private components. One of his findings was that English-style auctions, as compared with Dutch-style auctions, are less likely to involve the winner’s curse, and they generally yield greater revenues for sellers. This is because bidders in the English format are able to glean the specific valuations of other bidders by noting the prices at which those bidders drop out, which gives insight into the true value of the auctioned item. Accordingly, the remaining bidders are less likely to bid lower than their best estimates of the item’s value. Bidders in the Dutch format gain no (or much less) information about the valuations of other bidders, beyond the fact that those bidders’ specific valuations must be lower than that of the bidder who wins the auction.

Wilson and Milgrom together applied their theoretical insights to the development of new auction formats that could be used to sell multiple interrelated items simultaneously. One of their best-known innovations, called the Simultaneous Multiple Round Auction (SMRA), was developed in the 1990s after the U.S. government had tried unsuccessfully to allocate radio frequency bands tied to specific geographic areas. In 1994, in its first use of the SMRA format, the Federal Communications Commission (FCC) auctioned off single radio frequencies across multiple regions, raising more than $600 million in the process. The SMRA format was soon adopted in other countries, resulting in more than $200 billion in spectrum sales by 2014.