Improvements to Auction Theory and Inventions of New Auction Formats - by The Nobel Committee for Physics - Article review

Press Release
This document contains a review of the article: "Improvements to Auction Theory and Inventions of New Auction Formats " by The Nobel Committee for Physics
To order to read the article select:



1. Introduction

1.1 Improvements to Auction Theory

1.2 Inventions of New Auction Formats

Many predictions from the theory of equilibrium bidding had also been supported by empirical work using both observational and experimental data.
Sounds interesting. Requires more detail?
At this time, the main research focus shifted from single-object auctions to multi-object auctions.
Which introduces a complete new picture, compared to the auction of one painting.
This shift was largely due to a desire to use markets for trading a wide range of objects—like spectrum-frequency bands, electricity, and batches of “troubled debt”—that had previously been allocated in other ways.
As such these types of auctions have a high economic impact in both positif and negatif sense.
The number and size of the transactions of these objects tend to be huge, and even small efficiency gains in percentage terms can be worth billions of dollars to companies, customers, and taxpayers.
What means "efficiency" gains? Gains for who? Losses for who? (specific in relation to troubled debt). This sentence is too simple within a scientific context.

Page 5

Designing new auction rules to mitigate these problems typically requires a range of different inputs from auction theorists, regulators, and private companies. In this sense, practical auction design resembles engineering: a properly trained specialist can devise a suitable auction format for a specific economic setting, much like a sophisticated engineer can design a bridge for a specific geographic location.
The comparison with designing a bridge does not make sense. What is the toolbox available for a specialist to design an auction format? How do you know that such a new auction format does not favours some and harms others.
By identifying and analyzing some of the salient issues in auctions with interrelated objects, Milgrom and Wilson invented a number of valuable new auction formats and designs. The most famous example is the Simultaneous Multiple Round Auction, which they developed, in part with Preston McAfee, for the 1994 U.S. Federal Communications Commission’s radio-spectrum auction.
Okay. See: 3.3 Multiple Round Auctions
The improvements to auction theory have not only led to the invention of new auction formats.
What is the definition of auction theory?

Page 7

Models also make different assumptions to capture different auction formats: how prices are announced, how participants place bids, how prices are updated, how the auction closes, and how winners are selected.
Early auction theory compared bidding strategies and outcomes in four auction formats. They are (in alphabetical order): D, E, F and V
This answers the above raised question.

1.3 Organization of This Review

2 Single-Object Auctions

2.1 A General Framework

2.2 Private Values

2.3 Common Values

2.4 Private and Common Values

Page 13

Main Findings and Insights

Consider, for example, an English auction (E) and a sealed-bid auction.
The additional affiliated information revealed to the bidders during the bidding process will mitigate the winners’ curse and, consequently, encourage more aggressive bidding, leading to higher expected revenue for the seller.
That means there is an advantage for some and a disadvantage for others.
A similar logic supports the intuition behind the second main finding: a seller can expect a higher revenue by revealing her private information (in a nonstrategic way) to potential buyers.
Science (economics) has nothing to do with intuition.

Page 14

When applying the logic of the linkage principle, if the seller shares her private information, then the price in the resulting auction aggregates more private information, compared to the case in which the seller keeps the private information to herself.
The text is shown stronger to amplify the logic used.
The added information will mitigate the winners’ curse and therefore encourage more aggressive bidding, which in turn implies higher revenues.

2.5 Theory and Data

Precise predictions about equilibrium bidding and prices in specific auction formats paved the way for empirical testing.
Tricky sentence

Reduced-Form Observational Studies

Hendricks et al. (1987) and Hendricks and Porter (1988) argued that “neighbor” firms, which own tracts adjacent to the one leased in a particular auction, are well-informed about lease values, whereas “non-neighbor” firms are relatively uninformed and thus will suffer more from the winner’s curse.
It is important to mention that this is an example where buyers and sellers have economic relations with a common interest.
Moreover, neighbors should make positive average profits, whereas non-neighbors should make zero profits on average but negative profit conditional on neighbors not bidding.
This are complex rules. It is completely clear that this is not a normal auction.
Studies such as these convinced the research community that private information is highly relevant in the study of auctions, and that the game-theory models provide credible explanations for observed bidding in auctions.

3 Multi-Object Auctions

3.1 Share Auctions

3.2 Auctioning Interrelated Objects

In the early 1990s, an explosion of the demand for mobile communication made the U.S. federal government decide to use an auction for allocating radio-spectrum licenses among telecommunication firms.
The rules related to these auctions should be clearly specified, but before you do that the federal government should specify what it wants and than it possible by means of a simulation (which follow the rules) if these results are obtained.

Page 19

In fact, as early as in the 1950s, the 1991 Laureate Ronald H. Coase argued that the basic principle should be to allocate objects, such as broadcasting licenses, to the firms who will make the most efficient use of them, and the best way to identify these firms is to assign the objects through a competitive price mechanism
To understand this sentence you need a definition of the concept "most efficient" and "competitive price mechanism"

Efficiency and Social Value

Using maximal revenue as an objective for an auction of something like a set of spectrum licenses—or as a measure of the auction’s “success” —may be too short-sighted and lead to a monopoly market.
What this sentence implies implicates that the final solution will be very market specific and not general purpose
A higher degree of competition in the market will likely generate higher long-run government revenues and higher long-run welfare due to better and cheaper services.
It is IMO pure speculation is this is true. The word likely indicates that.

Page 20

Challenges in Multi-Object Auctions

The VCG auction allocates objects according to the maximal sum of bids and charges each bidder b the externality she imposes on the other bidders—the total value of the auction for all other bidders if b is absent minus their total value if b is present.
This sentence is difficult to understand.
Example 1. Two objects (A and B) are auctioned to two bidders (called 1 and 2).
This outcome is efficient.
What is the reason for this claim.

Page 21

For example, phone-service providers often seek to cover large areas, and so they prefer licenses for adjacent geographical regions. The FCC worried about other challenges as well. While bidders have different objectives and financial resources, the number of prospective bidders was uncertain. Furthermore, basic computational issues arose. With many licenses for sale, bidders could not be expected to bid for all subsets of potential objects.
No Comments. This text is only to show how complex the issues are.

Page 22

3.3 Multiple Round Auctions

Simultaneous Multiple Round Auctions

For the 1994 FCC auction, the final version of the newly designed auction was the Simultaneous Multiple Round Auction (SMRA), sometimes referred to as the Simultaneous Ascending Auction (SAA).
To prevent bidders from passively waiting for others to bid, the SMRA design included socalled activity rules. These rules induce every bidder to make a credible attempt at placing the highest bid for at least some object in every round. Specifically, at the first round, prices are set sufficiently low that all objects are in excess demand. In each round, bidders raise their bids by an integer number of increments on any object they would like to buy. At the end of each round, a “provisional winner” is determined for each object. The process repeats itself until the excess demand is eliminated and bidding has stopped for all objects. At that point, bidding closes and the provisional winners in the last round are assigned the objects and pay their current bids.
This text is only to show how complex an SMRA auction is. The word simultaneous is misleading because the whole bidders process consists of many rounds. I expect the word simultaneous is used to reflect that at any round many bidders are involved "simultaneously".

For more detail select this url: Spectrum auction

Page 24

The CCA differs from the SMRA in two main respects. The CCA is a combinatorial auction that allows bidders to place package bids.

Page 25

Practical Implementation

There is no silver bullet in auction design across contexts and market-specific details. However, the SMRA and the CCA formats both remain in widespread use. According to Koutroumpis and Cave, dozens of countries have now used some version of them to allocate frequency bands.
The first sentence says its all.
Problems associated with an auction may also reflect conflicting interests in society and politics.
What this sentence highlights is how unscientific auctions can be, when politics come involved.

3.4 Other Prominent Auctions

Product-Mix Auctions

The product-mix auction is thus better suited for financial markets where instant market clearing is an important concern. The Bank of England has successfully continued to use this auction format to sell batches of troubled debt.
What is the definition of "successfully" in this case? Succesfully for who?

Position Auctions

In terms of important real-world applications, Google has relied on this kind of format for selling keywords in Internet searches.
What is the definition of "important" in this case? important for who?
I expect for Google, however this requires more detail

4 Impact on Other Fields

In this penultimate section, we shift the focus from research on auctions to research in other fields. We first touch upon how the findings in auction theory—especially those made by Milgrom and Wilson—have enriched other fields.

5 Conclusion

Reflection 1 - General discussion

Trade in general involves a products, sellers and buyers. In a special case you can have 1 product, 1 seller and many buyers. In the case of an auction the object of the seller is to sell its product to the highest bidder
In the case studied to honnor the Nobel Price this is different.
Please read this document: This document writes:
Over time, societies have allocated ever more complex objects among users, such as landing slots and radio frequencies.
And next:
In response, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue.
What this means is that Milgrom and Wilson have studied a special case with a motivation based on a societal benefit. It should be an improvement to mention: with an economic motivation. This is completely different case specific if one country wants to sell something to its own citizens or its own industry. In that case it makes sense not to sell something to the highest bidder, but to try to sell it more equally among different citizens and industries.

The question is if this new format has also benefits to use within the EU.

To answer that question it is very important to study in more detail an auction performed with and without the new format to get a better idea what the benefits and disadvantages are.

For more detail select this url: Spectrum auction The reason of this 'review' is to get a better understanding what SMRA is. Unfortunate it is very difficult to get.

Reflection 2 - The winner’s curse.

IMO the importance of "The winner’s curse" is overemphasized. The curse is based on the rather non scientific concept that the final bidder pays too much. The only thing that is true is that the final bidder pays the highest price. This is the case, if the bidding process goes upward or downward. In the first case this is true because no one wants to pay a higher price and in the second case because all the people in the audience are willingly to buy a lower price.
But that does not claim that the final bidder payed too much. You payed too much if you can buy 'exactly' the same at a lower price. You payed too much if you want too resell it for the same price.

The central isue of an auction is: what is the price of the goods involved. As the producer of a good you want to sell it for a price, that you at least stay equal for the price of the raw materials payed and all the labour costs involved. All the additional money received is profit for the owners. All the rest depents very much how much identical products can be produced.

If you want to give a comment you can use the following form Comment form
Created: 11 Oktober 2020

Go Back to Book and Article Review
Back to my home page Index