Stanford economists Paul Milgrom and Robert Wilson have been awarded the 2020 Nobel Prize in Economic Sciences for their contributions to auction design, the Royal Swedish Academy of Sciences announced today.
The Nobel committee awarded Milgrom and Wilson the $10 million Swedish kronor prize, officially known as the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” for “improvements to auction theory and inventions of new auction formats.”
Wilson and Milgrom are internationally known for their research and teaching on auction market design, pricing, negotiations and other topics concerning industrial organization and information economics. Together and individually, the pair have played an important role in auction designs and competitive bidding strategies for the communications, oil and power industries, and in the design of innovative pricing schemes. Wilson has also influenced a generation of younger economists, including Milgrom.
“They have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies … Their discoveries have benefitted sellers, buyers and taxpayers around the world,” said the Royal Swedish Academy of Sciences, which grants the Nobel awards.
“The prize to Wilson and to Milgrom gives just recognition to one of the most important and successful applications of economic theory: auctions and auction design,” said Stanford business school economist David Kreps. “But their influence on what we do and how we think in microeconomics, especially applied to the study of management, goes well beyond auctions. Their impact on business schools and business school curricula cannot be overestimated.”
Wilson and Milgrom, the Shirley R. and Leonard W. Ely Jr. Professor of Humanities and Sciences, are credited with shaping the entire modern telecommunications industry, which arose from an auction format they developed, along with American economist Preston McAfee, for the 1994 radio spectrum auctions by the Federal Communications Commission. Auctions using their design have been used worldwide to allocate licenses worth more than $100 billion.
Milgrom has been at Stanford since 1987. He was the founding director of the Stanford Institute for Theoretical Economics and is director of the Program on Market Design at the Stanford Institute for Economic Policy Research (SIEPR), which supports research into the ways that the rules of an auction, exchange or other market affect its performance.
Starting with his dissertation research in the 1970s under Wilson’s supervision, Milgrom played a leading role in developing the theory of auctions when bidders have differential information about the value of an object being sold.
Milgrom also helped pioneer research on the design of auctions for large-scale problems where many bidders may be competing for many different types of goods. This research has had a substantial impact on real-world markets, and Milgrom has been a leader in designing economic mechanisms for use in industrial practice, from markets for radio spectrum to the sale of advertising on the Internet.
Milgrom also is known for his contributions to the economics of incentives and management, for his work on game theory and information economics, for developing one of the standard models of the microstructure of financial markets, and for numerous contributions to mathematical economics, particularly for advancing the modern theory of complementarities and positive feedback loops in economic model.
Milgrom co-founded a consulting company in 1996 to assist in the design of markets for commodities such as diamonds, timber, electricity, natural gas and radio spectrum and another company in 2009 to provide software solutions for conducting multi-product auctions.
Like Wilson, Milgrom has also mentored rising young economists, including Susan Athey, who won the 2007 John Bates Clark Medal as the outstanding economist in the North American under the age of 40; Joshua Gans, who won the corresponding prize for Australian economists the same year; and Yeon-Koo Che, who won the Cho prize as the most outstanding Korean economist in 2008.
Born April 20, 1948, in Detroit, Milgrom earned his bachelor’s degree in mathematics at the University of Michigan in 1970, and an MS in statistics and PhD in business at Stanford in 1978 and 1979, respectively. He taught at Northwestern and Yale before arriving at Stanford. He was elected to the American Academy of Arts and Sciences in 1992 and the National Academy of Sciences in 2006, was awarded an honorary doctorate in 2001 by the Stockholm School of Economics, and is the winner of the 2008 Nemmers Prize in economics.
Although he has published many articles in the literature of economics, Wilson is best known for applying theories about auctions to real-world market problems. In the 1970s he worked with the U.S. Department of the Interior on policies for auctioning leases for oil exploration. A later innovation was an auction system for the sale of industrial chemicals. Following that, he and Milgrom engaged in their design for the 1993 FCC spectrum auction.
Wilson also designed portions of the markets conducted by the Power Exchange, an auction system for the sale of electricity and reserve generation capacity that was used in California after the state deregulated its electric power industry in 1998. Wilson later contributed to designs used by the California and New England system operators. Wilson has been a staunch defender of using ideas from game theory to improve designs of markets. An article in a prominent journal of economics cited Wilson as “the dean of market design.” In 2002, Wilson told the Financial Times, “Game theory does not offer any specific answers to any specific situation. It says something like, ‘These are the things to take into account.’”
Wilson is the Adams Distinguished Professor Management, Emeritus, at Stanford Graduate School of Business.
Born on May 16, 1937, in Geneva, Neb., Wilson earned a bachelor’s degree in mathematics, a Master of Business Administration degree and a Doctor of Business Administration degree from Harvard University between 1959 and 1963.
He joined Stanford Graduate School of Business faculty in 1964. He served as director of Stanford’s Center on Conflict and Negotiation in 1990 and Institute of Theoretical Economics from 1993 to 1995. He was inducted into the National Academy of Sciences in 1994. Wilson also received the Stanford Business School PhD Faculty Distinguished Teaching Award in 2001 and was named a Distinguished Fellow of the American Economic Association in 2006.
In 2018, Milgrom and Wilson were jointly awarded the 2018 John J. Carty Award for the Advancement of Science with David M. Kreps.
Impact on the Study of Economics
Milgrom and Wilson are the 18th and 19th living Nobel laureates among Stanford’s community of scholars. Wilson is the fourth Stanford Graduate School of Business faculty member to win the Nobel. The school’s former Dean Michael Spence was honored in 2001 for his contributions to the analysis of markets with asymmetric information. Myron Scholes was honored in 1997 for developing a new method of determining the value of financial derivatives. William Sharpe received the prize in 1990 for his contributions to the theory of financial economics.
This story was originally published on Stanford News on October 12, 2020.