Auction Theory
Auction theory is a part of applied economics. It deals with designing real-world auctions, most notably the auctions for the electromagnetic spectrums. In an auction, some kind of resource is allocated to participants based on their bids, usually the highest. The bids can be placed openly or as sealed offers. Game theory has been used to study real-world auctions, strategies and participant behaviour.
In a way an auction is a price discovery mechanism. This mechanism is tied into how the bidders behave and how the rules are set. At the end of an auction, the highest bid ( or lowest if its a buy auction) is the price of the item under auction. The auction for electromagnetic spectrum is a bit more complex than a simple one where the items under the auction are auctioned off separately and the bidders are also independent. This is because there are certain combination of bandwidths that are more ideal than others. This gives rise to many more strategies and situations possible. Auctions are used widely to allocate scarce resources like mining rights and flight routes. This year’s Nobel Prize for Economics was awarded to Robert Wilson and Paul Milgrom for their work related to auction theory.