Discovering Prices: Auction Design in Markets with Complex Constraints (Kenneth J. Arrow Lectures)

Traditional economics focuses on hypothetical markets in which prices alone can guide efficient allocation, with no need for central organization. Such models build from Adam Smith’s famous concept of the invisible hand, which guides markets and renders regulation or interference largely unnecessary. Yet for many markets, prices alone are not enough, and regulation alone is not enough, either. Consider air traffic control at major airports. While prices could encourage airlines to take off and land at less congested times, prices alone are too blunt a tool; only with an air traffic control system can we avoid disastrous consequences. And yet, markets have the benefit of forcing efficiency: we don’t waste resources that we must pay to use. What’s needed in this and many other real-world cases is an auction system that can effectively incorporate prices while still maintaining enough direct control to ensure that complex constraints are satisfied.

In Discovering Prices, Paul Milgrom—the world’s most frequently cited academic expert on auction design—describes how auctions can be used to discover prices and guide efficient resource allocations, even when resources are diverse and there are critical constraints. Economists have long understood that externalities and market power both necessitate market organization. In this book, Milgrom introduces complex constraints as another reason for market design. Both lively and technical, Milgrom roots his new theories in real-world examples (including the ambitious U.S. incentive auction of radio frequencies, whose design he led) and provides economists with crucial new tools for dealing with the world’s growing complex resource allocation problems.