PATW_ch1 - Chapter 1 Getting to Work The era of putting...

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From Putting Auction Theory to Work by Paul Milgrom. ' 2002 Chapter 1 Getting to Work The era of putting auction theory to work began in 1993-94, with the design and operation of the radio spectrum auctions in the United States. Although the economic theory of auctions had its beginnings in the early 1960s, early research had little influence on practice. Since 1994, economic auction theorists have designed spectrum sales for countries on six continents, electric power auctions in the US and Europe, CO 2 abatement auctions, and various asset auctions. By 1996, auction theory had become so influential that its principal founder, William Vickrey, was awarded a Nobel Prize in economic th anniversary celebration featured the success of the US spectrum auctions to justify its support for fundamental research in subjects like game theory. By the end of 2001, just seven years after the first of the large modern auctions, the theorists& designs had powered worldwide sales totaling more than $100 billion. The early US spectrum auctions had evolved into a world standard, with their major features expressed in all the new designs. It would be hard to exaggerate how unlikely these developments seemed in 1993. Then, as now, the status of game theory within economics was a hotly debated topic. Auction theory, which generated its main predictions by treating auctions as ±games,² had inherited the controversy. At the 1985 World Congress of the Econometric Society, a wide gulf developed between bargaining theorists, who were skeptical that game theory could explain much about bargaining or be useful for improving bargaining protocols, and researchers in auctions and industrial organization, who believed that game theory was illuminating their fields. Although game theory gained increasing prominence throughout the 1980s and had begun to influence the leading graduate textbooks by the early 1990s, there was certainly no consensus about it in 1994, when the Federal Communications Commission conducted the first of the new spectrum auctions. The traditional foundations of game theory incorporate stark assumptions about the rationality of the players and the accuracy of their expectations that are hard to reconcile with reality. Economic experimenters have tested the predictions of auction theory in laboratory experiments with human bidders and found many violations, but some key tendencies predicted by the theory do find experimental support. The findings indicate that existing theories oversimplify the way humans play games, and that real world auction design must be undertaken like other practical arts, by mixing theory with experiments and practical judgment. Whatever the doubts in the academy, the dramatic case histories of the new auctions
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PATW_ch1 - Chapter 1 Getting to Work The era of putting...

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