Third MEDS Professor Who Did Seminal Work at Kellogg Receives Nobel Prize
Former Professor Paul Milgrom’s Win Shows the Legacy of Advancing Economics in Kellogg’s MEDS Department
Faculty contributors to this article include Jeroen Swinkels, Mark Satterthwaite, Peter Klibanoff, Joshua Mollner, James Schummer, Ehud Kalai and Sandeep Baliga.
On October 12, 2020, the Sveriges Riksbank Prize in Economic Sciences in Honor of Alfred Nobel was awarded to Paul Milgrom and Robert Wilson. Milgrom and Wilson — who are longtime collaborators — are receiving the prize for "for improvements to auction theory and inventions of new auction formats."
“Auctions are everywhere…and affect everyone’s lives.” Tommy Andersson says, a member of the committee for the Prize in Economic Sciences. “When you open your browser, someone is placing a bid to show you ads. Whenever you pay your electricity bill, the price is determined by the outcome of different auctions. Nowadays, the European Union and many other parts of the world sell emission allowances for CO2 — so, indirectly, auctions also affect how we breathe.”
Milgrom is the third previous faculty member from the Kellogg School of Management to have received the Nobel Prize in Economic Sciences, joining Roger Myerson and Bengt Holmström.
Milgrom was a thesis advisee of Robert Wilson at Stanford Graduate School of Business. After receiving his PhD from Stanford, Milgrom became a faculty member in the Management Economics & Decision Sciences (MEDS) department at Kellogg School of Management, where he developed seminal work from 1979 to 1983. Also at Kellogg during this time were Roger Myerson, Bengt Holmström, Nancy Stokey, Robert Weber, John Roberts, David Baron, Ehud Kalai, and Mark Satterthwaite.
This time period in the MEDS department at Kellogg marked a significant era for the field of economics, where incredible strides were made to advance the field, specifically in auction theory.
“Auctions are tremendously important and there were really only a handful of places that they were being studied with seriousness,” Jeroen Swinkels says, Kellogg’s Richard M. Paget professor of management policy.
Auctions lay down the foundation for how we think about price formation. “So, where do prices come from?” Swinkels asks. “How is it that traders on the stock market use what they know or don’t know and incorporate that into the price? Auctions provide that micro-foundation that allows you to think explicitly about it. And that’s been a thrust which extends through work from Wilson to Milgrom to all sorts of other people — many of them MEDS associated.”
Ehud Kalai, professor emeritus of MEDS, remembers this time clearly.
“The spirit in the department was such that people collaborated so much,” Kalai says. “During these years we had an excellent collaboration with Bob Wilson. And Paul published extensively with the other great young people in the department. His early major paper on auctions was joint with our colleague, Bob Weber.”
It was this paper, “A Theory of Auctions and Competitive Bidding,” — which Milgrom co-authored with fellow Kellogg faculty member, Bob Weber — that founded the “linkage principle,” which determines that if an auction provides more information to bidders, then the “winner’s curse” is mitigated — since bidders, not needing to fear the winner’s curse as much, will bid more aggressively and the auction’s revenue is higher on average.
To understand the significance of this contribution, one needs to first understand the existing groundwork of common and private values auctions, and the “winner’s curse.”
“A common values auction,” Swinkels says, “is one where you and I have the same basic preferences over what we’re buying but we might have different beliefs. And so, issues around what is called the ‘winner’s curse’ become very central. It’s this idea that as soon as I win I should be nervous, because it means that a bunch of smart people around me bid less than I did and so maybe that means it’s not as good as I thought it was.”
“There’s also a private values auction,” Swinkels goes on to say, “which is when we all know what we’re buying or selling. What Milgrom and Weber did was provide a mathematical framework where, for the first time, you could think about auctions which had a little of both. And they provided to this day — which is almost 40 years later — the paradigmatic model in which we think about these things.”
James Schummer, associate professor of MEDS at Kellogg, adds to the significance of Milgrom and Weber’s development of the linkage principle.
“When you’re running an auction, should you run it like Sotheby’s art auctions — something you’ve seen in the movies? Or should you run it by sealed bid? The answer is ‘it depends,’ as is everything in economics. And what Milgrom and Weber figured out was how it depends on exactly what and how and why,” says Schummer.
This work of Milgrom and Weber builds on Robert Wilson’s foundational work on the “winner’s curse” and has also become foundational. Their paper now has approximately 5,000 citations.
Another notable economist in MEDS at that time was Mark Satterthwaite, professor emeritus of managerial economics.
“Mark founded the literature on large auctions,” Swinkels says. “The idea in many auctions is that there’s just one object for sale. But you can also think about an auction for shares of a farm or emissions rights in a trading market. In those auctions, there’s lots of buyers and sellers — a double auction — with bidders on both sides. These auctions are performing two fundamental roles: they’re performing an information aggregation role — where they’re trying to put together what different traders know — and they’re trying to perform an allocation role — where they’re wanting to make sure the right people are getting the right objects. Mark founded that literature.”
Reflecting on that time period in the MEDS department and the work that was developed, Satterthwaite says, “This was a very important group of people.”
After leaving Kellogg, Milgrom went on to develop his work in areas of application. “He set up package auctions — or combinatorial auctions — where you bid for combinations of things. That’s a very important contribution to his body of work,” says Sandeep Baliga, John L. and Helen Kellogg professor of MEDS.
A prominent example of applying combinatorial auctions is Milgrom and Wilson’s auction format designed for when the Federal Communications Commission first sold radio frequencies to telecommunication companies.
“For example, Verizon or AT&T want to buy the rights to broadcast over the airwaves in the telecommunications industry. If you want to broadcast over the airwave signals from New York to Chicago, you’re going to have to tie together the rights over certain geographical areas, and the FCC auctions off these rights simultaneously. This requires going further with the auction design,” Schummer says.
Forty-one years since Milgrom’s time in MEDS, the legacy of making significant advancements in this field continue to be made by Kellogg’s current faculty in the MEDS department.
“This is an ongoing legacy. And as it turns out, Josh has this rather direct line to Milgrom,” Swinkels says.
Joshua Mollner joined Kellogg’s faculty in 2016 as assistant professor of MEDS and is now an associate professor. Prior to joining Kellogg, he was at Stanford University in the doctoral program, where Milgrom was his thesis advisor. Now, at Kellogg, his research focuses on financial trading, which is closely connected to auctions.
Recently, Mollner and Milgrom became collaborators, co-authoring a paper published in Econometrica, with another co-authored paper soon to be published.
Thinking back to his time as Milgrom’s student at Stanford, Mollner says, “It was a really incredible experience. I remember many times when he’d send me off to think about a problem and I’d think about nothing else for a week. When I’d finally meet with him to let him know what I’d figured out, within five minutes he’d be up to speed and jumping ahead of me. The speed at which his mind operates is awe-inspiring.”