Theoretical Development of Auction Market Design and Innovations of New Auction Formats — A Review of Main Contributions by 2020 Nobel Economics Laureates

Abstract

Robert Wilson and Paul Milgrom won the Sveriges Riksbanks Prize in Economic Sciences in Memory of Alfred Nobel 2020 for “improvements to auction theory and inventions of new auction formats”. This paper focuses on how they expand the auction theory to make it more realistic and practical, and how to creatively design new auction formats to meet the challenges posed by the auction of multiple objects, as well as the experience and lessons in the process of auction market design and reference value of their contributions. To sum up, there are three aspects that merit attention:First of all, auction is a way to “utilize the knowledge scattered among all the people (Hayek, 1945)”. Their improvements to auction theory and the invention of new auction formats are all centered on the core problem of how to make full use of the information scattered in private to realize the efficient allocation of resources. From this point of view, auction studies how private information can be aggregated and revealed under different auction formats, how efficient the equilibrium results can achieve, and how to improve it through mechanism design. These problems are also one of the main problems of economic policy and economic system reform. Therefore, their contributions not only have direct reference value for auction market design in China, but also have important reference value for more general problems in economic policy-making and economic system reform.Secondly, their contributions to auction research set up a classic example for modern economics research. Modern economics provide economists with a lot of theoretical benchmarks to examine the real world. By comparing the differences between the real world and the benchmark, economists find out which assumptions of the benchmark model are inconsistent with the reality, and modify them, so as to expand and enrich the content of economic theory. Their development of auction theory is centered on the modification of the premise of income equivalence theorem, which is the embodiment of this typical process of economic research. In addition, many of their problems in the research of auction market design come from auction practice and are committed to solving practical problems; auction research opens up a new field for game theory, which in turn consolidates the theoretical basis of game theory. This embodies the typical evolution process of mutual promotion between theory and practice in the process of modern economic research.Last but not least, their research on auction market design shows the importance of details in auction market design. In fact, the revenue equivalence theorem which is the benchmark of auction theory is arrived at under strict assumptions. The change of the assumptions will change the strategic equivalence of various mainstream standard auction formats. In real life, we need to choose the appropriate auction format according to the specific conditions. The auction market design is more easily affected by the details in the auction of multiple objects. Therefore, specific market auction design depends on the specific situation. Auction market design should consider the specific environment of specific problems. Careful consideration of various possible problems and careful design of various details are the most important things to consider in the process of solving economic problems with reference to auction market design.