How Auctions Can Drive Down Carbon Emissions in Game Theory
Various people would argue that the global financial crisis of 2007-09 taught people more than just irrelevance and the dangers of economic theory. Even so, the Nobel committee has awarded its economic prize for 2020 to two theorists, Paul Milgrom, and Robert Wilson, for advances in game theory and specifically auctions.
According to Robin Mason from the University of Birmingham, the committee was right to give them the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for more than one reason. The first being that the theoretical advances made by the Stanford professors are in themselves worthy of the prize.
Bob Wilson moved past William Vickery’s work, who was a Nobel Laurette in 1996. Vickery was the first to employ game theory to explain how auctions take place. He talked in the crucial case where the value one bidder ascribes to the auctioned item is unrelated to any other bidder’s value, known as the “private values” case. Instead, he focused on “common values,” where individuals are attempting to win an item that they both values equally; however, both are uncertain of its value.
This could be used in companies bidding for the rights to an oil field; say, if one entity estimates that there is a lot of oil in the field, then it is more likely (however, not certain) that the others do as well. Equally, the company could apply to people bidding on eBay for an object discounted from its usual retail price (one incredible side note to the Nobel award is that Bob Wilson admits to having participated in only one auction; to purchase ski boots on eBay).
A crucial insight of Wilson’s analysis is the need for bidders to avoid the “winner’s curse”. Winning often means outbidding the other in the activity; however, if others bid less, it then means that they think winning is less valuable than the other party does.
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