Noble Economics 2020 .. What if you put your smartphone up for auction?

Well, as long as we're talking about the economics of game theory, the best thing to start with is a simple game.

Suppose there is a deep glass vase that contains a large number of 1 pound coins. You can throw a peek at the vessel, but you cannot count the coins. We are now in a large hall with 50 university students. We asked each of them to put a price. When the glass container contains, then he writes it in a paper with complete secrecy and writes his name on the paper, then the papers are sent to one of them to arrange the evaluations and give the contents of the glass vessel to the highest evaluation holder, and take the price from him.

Let's say, for example, that one of them estimated the value of the pot at 110 pounds, the other estimated it at 95 pounds, a third estimated it at 115 pounds, and you estimated it at 117 pounds, and fortunately for you, you won this auction after the results were announced and I got the pot and started counting, how many coins Are there in this vase?

Yes, you won the auction, but did you win how much you paid or lost?

Let us leave the answer to this question now. Let's first get to know the types of auctions. We are used to the auction, which usually includes sentences of the quality of "Who provides?", For example, a painting, the auction starts from the lowest possible price for a painting, let it be 80 thousand dollars, after that One of them will say: “One hundred thousand dollars,” another will add: “one hundred and twenty,” and the third competitor will say: “one hundred twenty-two.” The auction continues to escalate, and with time the number of competitors decreases until there is only one remaining able to bid. The black suit, it was offered a quarter of an hour after the start of the auction, two hundred and thirty-three thousand dollars, the auctioneer says in Italian: “Alla unna.

This type of auction is called the English auction, you usually find it in movies and series and you think that it is the only type, but although it is the most common, there are other types of auctions such as the Dutch auction, which is the opposite image of the English auction, where The auction manager starts with the highest possible price for a painting, for example, three hundred and fifty thousand dollars, then continues to go down, who buys with three hundred forty?

Who buys three hundred and thirty?

Who buys three hundred and twenty?

And so the auction continues until someone says, "I'm buying," and the painting is sold.

Another type of auctions is clearly visible in government tenders, for example the iron and steel company affiliated with the government offers an opportunity to develop its electronic system throughout the country, computer companies compete for this opportunity by submitting bids in secret envelopes that are sent to the Ministry of Industry, the government arranges all Bids and allow the company with the lowest bid to deal with it.

Therefore it is called "sealed envelope bidding auction".

There are many types of auctions, and as long as the question about the best ones is a preoccupation for many economists, so that both the seller and the buyer can benefit. In the 1960s, William Vickery, a Nobel-winning American economist, presented an auction theory. Interested in a very special case, which is that the sold material has a "private value" only, that is, a value that you place on the basis of your special situation that is different from the conditions of others.

For example, let's assume that we are holding an auction for dinner with the artist Amr Diab, if you win, you pay the money and sit for several hours to eat and discuss with your favorite singer, the value of the food here will be neglected because the idea in evaluating the meeting, which is related to your personal appreciation of the very famous artist, some People greatly honor this singer and decide to bid for four thousand dollars, but others do not care so they evaluate the meeting at an average price, let it be five hundred dollars.

Tommy Anderson, member of the Alfred Nobel Memorial Prize Committee in Economic Sciences, speaks during the announcement of the 2020 Nobel Prize winners in Economic Sciences

The private value differs from the common value, the latter means that there is an objective value for the thing, for example an oil well, we can know its area and the area in which it is located and estimate the amount of oil in it, and according to the global price of oil we can give an estimated value of the well, but in a land In reality, there is no fully private or fully shared value, there is a combination of the two cases, for example in the case of an oil well, there are - however - special values, as your company has a different refining technology from other companies, it also has different transportation mechanisms and a different chemical treatment system. Which gives different values ​​to the same well.

According to Vickery, famous auctions - like the Dutch and the English - give the same expected revenue to the seller, but Robert Wilson, a professor of economics at Stanford University and winner of half of the Nobel Prize for Economics 2020, had a different opinion, paying more attention to the so-called "winner's curse" (the winner's curse) on auction types, to understand the idea let's get back to our first game.

You've already won the coin auction, Mubarak, but don't you notice anything?

The ratings of 49 other students, of your competitors, are lower than your evaluation of the content of the glass container, and the evidence for this is that you won, this raises the following question: Why did they rate less than you?

Do they have information other than what you have about this vessel?

Did someone tell them anything while I was out?

Was your rating more optimistic than supposed?

The curse of the winner means that the winner of the auction will be the owner of the highest evaluation of the commodity, and therefore he will be the owner of the lowest gain and may lose completely. If we count the coins, we will find them, for example, 105 pounds. You lost and you were the winner here because you paid 117 pounds.

In three papers published more than half a century ago, Wilson indicated that, in consequence, in upcoming auctions, you will be forced to reduce the value of the item if you do not know enough about it, or more precisely: the greater the degree of "uncertainty" about Shared value, if we assume, for example, that the same game has been repeated within minutes of the first game, with a new container and a new amount of money, it is likely that you will suggest an amount ranging between 80-100 pounds, for example.

Because this will happen with all sellers for the same reasons, Wilson's theory indicates that the amount of uncertainty about the nature of the “good” will force buyers to act the opposite of what the seller could imagine in the auction, lowering their expectations of value for fear of falling into the “winner’s curse”, and thus will introduce The cheapest bid, and Wilson's analysis indicated that the amount of information, if it is not distributed evenly among buyers (one of them knows information the other does not know), they will tend to be more cautious and lower their expectations more, which hurts the seller in all cases.

At that point appears Paul Milgrom, who won the other half of the award this year, and works with Wilson at the same university, where he was able - in the eighties of the last century - to solve very complex analytical problems that both Vickery and Wilson could not go through. The best auction is the one that is based on making more information available to buyers, for example if you want to sell your home, and there are a number of bidders, it is better for you as a seller to refer bidders to independent experts in home evaluation before they say their bids, because This increases the chance that they will not be afraid of the "winner's curse" and thus will compete with more expensive bids (can you imagine that? It's the opposite of what you might think!)

In the same context, there are types of auctions that motivate the "winner's curse" more than other types. For example, let us compare between the English auction and the Dutch auction. In the English auction, the sellers raise their bids gradually overtly, and thus their estimates of the commodity develop over time because they see other sellers present their evaluations. For the commodity and they compare those evaluations with the evaluations they assert, but in the Dutch auction, all evaluations are confidential, and as soon as only one evaluation appears, he will be the winner, here Milgrom says that auctions that provide an opportunity for more information (think competitors' evaluations) are better because they reduce the impact of The curse of the winner, and thus you will gain more for the seller, as well as for the buyer, in that case everyone wins (Win-Win Situation).

These theoretical achievements have strongly affected the course of economic operations over the past decades, one of the most famous examples here is a new type of auction that the Nobel couple developed to treat a very special case related to the electromagnetic spectrum auctions, where the state sells packages of the electromagnetic spectrum to mobile phone, television and Internet companies, Some of these packages are rare and some are common, and they are distributed in different places in the same country, which means that the competition between companies is very complex because it includes multiple criteria at the same time, each of which is related to the other and has its own auction.

For example, many countries in the world are currently opening their doors to 5G technologies, companies compete in consecutive auctions for packages of these technologies across the country, and some companies would like to obtain packages in certain regions on the condition that other packages are obtained in other regions. This is because the auction for one region will determine the bid value in the auction for another region.

At that point, Wilson and Milgrom's theories intervene to indicate that the availability of information is the most important thing for the government to achieve the largest possible gain, and thus public auctions are better than auctions of closed envelopes.

On the other hand, if there are a number of auctions about different packages for the electromagnetic spectrum in different places within the country, it is preferable to hold all auctions simultaneously together, because this provides more information to companies about the bids submitted, rather than having future information unavailable that may direct the companies To curse the winner.

For these reasons, Wilson and Milgrom developed a new auction called "Simultaneous Multiple Round Auction". Because of this smart auction, the government is making the best gains, as are the buyers, and many governments around the world use it in auctions of the electromagnetic spectrum.

The matter is therefore very complicated. At first glance, when you hear the word "auction", you think that it is only related to paintings and old tanks that we see in movies and read about in novels, but the auction is a major nerve in the contemporary economic process. For example, you imagine that a country offers a plot of land to establish Factories or offering part of its territorial waters in order to compete with the refiners for the right to search for gas in them. Imagine a competition between a group of companies over a desert plot provided by the state to establish solar cells or an attempt by the state to launch space missiles.

The matter proceeds to selling on the Internet. In one way or another, it is a picture of the auctions, whether you are displaying your "PlayStation 4" on one of the second-hand sites and waiting for the highest price, or you buy a product and compare the offers made by different companies, This is developing to include almost everything future, and this is why Nobel Economics came this year to say how sober theoretical products were made by a group of thinkers decades ago, and in which they published dozens of research papers stacked with complex mathematical equations and analyzes, that could shape the entire contemporary market we know. That's really speculative.

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