the mathematics of auctions, which net the Treasury billions

in: Prosperity


Research funded by the National Science Foundation, Office of Naval Research, and the Atomics Energy Commission led to creation of new auction format that the Federal Communications Commission uses earn billions by selling licenses to radio frequency bands that make wireless communication and transactions possible.

Your neighborhood garbage retrieval, the cost of cooking or heating your home, and the breadth of coverage your mobile phone provider offers all have something in common: auctions. Contracts for garbage pickup, electricity rates, and access to the electromagnetic radio frequency bands that enable wireless communications are all determined by auctions. The auctions that determine cell coverage are the direct result of federally funded research from when bell bottoms were stylish; the research figured out the math behind auctions and later led to the depositing of billions and billions into the United States Treasury.

You probably have an intuitive sense of what an auction is, likely involving a scene with a rapidly speaking auctioneer rattling off bids until finally bellowing “SOLD!” Understanding how auctions work is challenging because of different rules they can have and because bidders, whether they be individuals or businesses, can use a variety of strategies while trying to win.

Since the late 1970s, the United States government has been funding research into auctions, work led by Stanford economists and 2020 Nobel laureates Paul Milgrom and Robert Wilson. The United States Atomic Energy Commission funded research on auctions with the goal of understanding the strategies that bidders use, and the Office of Naval Research funded projects on auctions with the goal of improving the bidding process for ship-building contracts. The National Science Foundation also funded mathematics-focused studies that clarified the strategies that bidders use and the impact of auction rules—such as whether the bidding starts with a low price or a high price—on the outcome.

In the mid-1990s, the United States Federal Communications Commission solicited ideas from academics like Milgrom and Wilson to improve how they gave out licenses for using electromagnetic radio frequency bands owned by the government. These bands carry sound and data—this is how cell phone calls, texting, sending viral memes, tap-to-pay technology, and video chatting or streaming video are possible. And, the federal government used to give away access to these bands for free!

The Federal Communications Commission used to rely on companies submitting proposals explaining why they were the best choice, a process that saw a lot of lobbying and money changing hands. They also tried a lottery, but it happened at the local level, which meant that national wireless companies had spotty coverage due to randomness inherent to lotteries. No one was happy, and the federal government was still not compensated for access to the frequency bands.

Milgrom and Wilson, with contributions from American economist Preston McAfee, used the knowledge on auction rules and bidder strategies amassed from decades of federally funded research to create a new type of auction to sell access to radio frequency bands. This auction is called a simultaneous multiple round auction, and it proved to be efficient and fair. For the first time, allocating access to the government-owned radio frequency bands made the taxpayers money—a lot of money! The Federal Communications Commission held the first simultaneous multiple round auction in 1994, selling 10 licenses and depositing $617 million in the United States Treasury. In the 20 years that followed, the Federal Communications Commission earned $120 billion dollars for the Treasury using these auctions.

Simultaneous multiple round auctions are now used to sell electricity and gas and are also used by other countries, including Germany, Finland, India, Canada, Norway, Poland, Spain, and the United Kingdom. Taxpayers from all over the world have earned more than $100 billion because of knowledge from federally funded research that let economists invent a new auction format.



← Back to home page