A classic auction features someone with a loud voice yelling to a crowd of people raising auction “paddles” to outbid one another for a piece of art, cattle or rare memorabilia.
But during the early days of the pandemic, states were thrown into a different type of auction, where instead of cattle, art or memorabilia, they competed against another for lifesaving ventilators and personal protective equipment.
The free-for-all frustrated some officials. “You now literally will have a company call you up and say, ‘Well, California just outbid you,’” New York Gov. Andrew Cuomo, a Democrat, said at a March 31 coronavirus news briefing. “It’s like being on eBay with 50 other states, bidding on a ventilator.”
Cuomo added, “You see the bid go up because California bid, Illinois bid, Florida bid, New York bids, California rebids. That’s literally what we’re doing. I mean how inefficient.”
Paul Milgrom and Robert Wilson, the recipients of this year’s Nobel Prize in Economic Sciences for their auction theory research, echoed Cuomo’s assessment that the situation was less-than ideal and shared suggestions on how to improve it inspired by their Nobel-winning work.
“States were competing against each other and simply bidding up the prices, which weren’t creating more respirators, but were putting strains on the medical system,” said Milgrom during a press conference arranged by Stanford University, where both winners are professors.
The framework Milgrom and Wilson developed focuses mainly on complex auctions such as ones for radio frequencies or electricity. In those scenarios, it’s in the public interest for an entity to, in some cases, hold multiple licenses or obtain the rights to complementary goods. In other cases, however, it isn’t, and can lead to dangerous monopoly control over essential resources.
That’s different from an auction on eBay
where buyers are competing for a single item.
In the case of ventilators and personal protective equipment, it isn’t in the public’s best interest for one hospital to buy up all of these goods simply because they are willing to pay more than all the other hospitals in the country.
The government could have allocated ventilators based on projected need
One solution to the problem Cuomo described, Wilson said, is a system in which “the government allocates on the basis of projected needs.”
That could be determined by “the number of possible patients that would arrive at a hospital,” Wilson said, adding that this would be the “initial allocation.”
‘The artificial currency is something that we put in to make sure that it’s not a matter of just the wealthiest people getting all of the resources’
“A market can help by then allowing hospitals to exchange PPE (personal protective equipment) among themselves to improve efficiency.” Meaning that a hospital that needs more masks than ventilators could trade with a hospital that is in need of more masks and not ventilators.
Taking that further, Wilson said that a medium of exchange for these transactions could also be an artificial currency that could only be used by hospitals for procuring protective gear and equipment from one another.
“The artificial currency is something that we put in to make sure that it’s not a matter of just the wealthiest people getting all of the resources,” Milgrom added. “It’s something to promote efficient allocation of resources among the parties that participate while still having some control over equity issues.”
Auctions affect the ads we see on websites and our retirement savings
So how can people participating in auctions on eBay or at Sotheby’s use Milgrom and Wilson’s research to their advantage?
“We don’t really have any tips for people who are participating in auctions as simple as that,” Milgrom said. “There are, I can tell you, from time to time stories about badly designed auctions for single items that we’ve managed to exploit the rules,” he said, “but those are special cases and I think I’ll keep them private.”
The average person cannot easily “apply this to make their lives better,” Tommy Andersson, a member of the Nobel Economics Committee, said referring to Milgrom and Wilson’s work.
‘Auctions are everywhere and it’s affecting your life and my life every day both directly and indirectly’
“But I think they can use it to understand how their lives are affected by this,” he told MarketWatch.
“Auctions are everywhere and it’s affecting your life and my life every day both directly and indirectly. Most people don’t participate in auctions themselves, but everything they consume is an outcome of an auction essentially,” Andersson, an economics professor at Lund University, based in Switzerland, said.
One example is the ads that appear on websites.
The ads one person sees on the same website are likely to be different than the ads another person sees. That’s a result of “auctions that run in the background based on your previous searches,” Andersson said.
Financial assets like U.S. Treasury bills are also bought and sold in auctions. The outcome of those auctions “will affect your retirement savings,” he noted.
Gig workers could use auctions to their advantage
Though not directly related to Milgrom and Wilson’s work, gig workers who have the ability to set their own rates can benefit from auctioning off their services to individuals on platforms like TaskRabbit as opposed to taking a job as a salaried worker.
‘The gig economy looks more like an auction and takes some price-setting power out of the hands of employers, it might be easier for really good workers to get paid what they’re worth’
“Since workers set their own prices instead of companies paying salaries, workers can feel free to charge more if they think their work quality is higher,” said Anthony Lee Zhang, a finance professor at Chicago’s Booth School of Business.
“In a company, the highly-rated plumber would only get paid more if they get promoted,” he told MarketWatch. “The gig economy looks more like an auction and takes some price-setting power out of the hands of employers; it might be easier for really good workers to get paid what they’re worth.”