Public auction theory and policy : Relevance to the economy and society

Dr Longjam Krishnamangol Singh *

In fact, the Nobel prize in Economics of the preceeding year 2020 is related to the auction theory or acution market. It would therefore, be relevant to get an insight into the auction theory in order to newly unfold or explore the contributions of the Nobel prize winner in economics of the pevious year 2020.

The term “auction” refers to the sale of commodities or goods through bidding by prospective buyers. Thus, the auction theory determines how goods or different commodities are sold to the persons who make the highest bid for them (i.e. the commodities). And, according to traditional auction theory, the usual method of sale is based on organised commodity markets.

In fact, in the commodity markets where there is lack of supply, auction can be done for such goods as grains, fishes, wools, tea and any other such consumer goods. Thus, in such commodity markets, the commodities are not easily graded or valued.

And, in the case of commodities such as cotton or wheat whose prices are fairly administered or fixed the commodities are easily sold without auction. That is to say the goods are sold at a fixed price without bargining. Thus, auctions are not commonly found at the retail stage in the market.

In practice, it is found that rare goods of art and culture or other rare antiques are usually sold by auction. But, this method of sale has limited market. Thus, this method of auction or sale of goods has little relevance to the society as a whole. In fact, the traditional auction theory cannot widen or expand the market of various goods and services.

As already noted, in traditional auction theory, an auction is a process of sale of an article or a good whose price is fixed by an auctioner who sells the article or the good to the highest bidder. But, there is also an exceptional case where the articles or commodities/goods are sold to the first bidder at the lowest prize.

For example, in a Dutch auction, there is a reverse procedure of the traditional auction theory. In fact, in the Dutch auction system, the commodities are being offered for sale at the lower prices to the bidder. Thus, the public auction theory seeks to capture the market for certain goods in order to make the goods or the commodities available to the public.

Here, it is interesting to note or recall that last year’s Nobel prize in economics or the Nobel economics prize for the previous year (i.e. 2020) was awarded to the two US economists, Paul Milgrom and Robert Wilson both of Stanford University of US.

Without repeating the details of their works which have been widely published in the National papers at the time of the announcement of Nobel economics prize in the previous year (i.e.2020), it would be further relevant to point out that their research contributions on auction theory have largely benefitted sellers, buyers and taxpayers. (The Hindu, October, 13, 2020).

In fact, the two US economists have developed a new theory for auctions or a new auction theory, which is designed to explain the behaviour or the role of the key players in modern markets (i.e. the role of sellers, buyers and taxpayers). Thus, it is reported that the discoveries by these two US economists have benefitted sellers, buyers and tax payers around the world.

And their works sought to expand the commercial auctions of the goods and services, which are difficult to sell in the traditional market system. In fact, their works improved or developed the auction theory with new formats for expansion of the modern market for various goods and services.

It is interesting to note that Professor Wilson (83) of Stanford University in the US was credited for developing a theory of auctions with a common value of goods or commodities, which is uncertain before the auction, but acceptable to all at the end.

Thus, the auction theory with a common value or price of commodities developed by Professor Wilson helps in the expansion of modern markets. Again, the auction theory developed by Professor Wilson further showed why rational bidders tend to bid the goods or the commodities under their own estimate or judgement in order to avoid the “ winner’s curse” or the overpayment of the goods or the commodities by winning the auction.

Thus, the auction theory developed by Professor Wilson is linked to the price policy of the goods or the commodities with new auction formats and also to the rational behaviour of the bidders or the consumers.

Like Wilson, Mr Milgrom of Stanford University of the US has developed a more general theory of auctions by analysing different bidding strategies on the basis of different auction forms or formats, which helped in the expansion of modern markets.

In developing the new auction theory or the general theory of auction, the two economists have also discovered that the people or the sellers/auctioneers have always sold things or goods/commodities to the highest bidders and that they will also have to allocate or distribute more complex objects in the bidding process.

Their new auction theory further emphasised that the sellers or the auctioneers on behalf of the sellers can sell the goods at decreasing or reduced prices in order to capture the modern markets. Thus, the new auction formats developed by the two economists seek to promote or achieve broad societal benefits instead of maximising revenues of the sellers or the aucioneers.

In fact, the new auction formats developed by the two economists seek to expand modern markets and provide societal benefits in the process of auctioning off a large number of objects to the people. Thus, it would be relevant to note that free price mechanism applies to the auctioning off or selling a large number of goods and services in the modern markets.