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Bob Hawkes

Can The Nobel Prize In Economics Improve Domain Auctions?

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By Bob Hawkes, Oct 14, 2020
  1. Bob Hawkes

    Bob Hawkes Top Member NameTalent VIP Gold Account Trusted Blogger

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    This week the Nobel Prize in Economics was awarded to Paul Milgrom and Robert Wilson, both from Stanford University, for their work in better understanding and optimizing auctions. The Nobel Prize press release says
    Auctions play an important role in the domain world. Most domain investors acquire names through expired and domainer auctions, some retail sales are via auction platforms, and registries win the right to new extensions in auctions, in some cases. At any time there are many dozens of domain auctions happening right here on NamePros.


    Auctions Are Everywhere

    While you might first think of auctions on sites like eBay or at community events, auctions are used to sell or allocate many things at both the business and consumer level. The wireless band your cell phone uses was distributed in an auction, as are mineral rights, works of art, automobiles, insurance holdings, and much more.

    The Nobel laureates designed the auction system that was used for assigning wireless frequencies in the United States, and the initial auction brought in about $20 billion. The model was used in later wireless auctions, and in other countries, and adapted to selling of other things.

    At least 2500 years ago there were auctions in ancient Babylon, and auctions were commonplace during the Roman Empire. There are also records of auctions in ancient Japan and China.

    In the detailed background paper accompanying the 2020 Nobel Prize, the case is made that “Auctions are certainly of far greater importance today than at any time in the past.

    While auctions have a very long history, the history of auction theory is much more recent. William Vickrey, who won the Nobel Prize in Economics in 1996, performed some of the early development of the field.


    Types Of Auctions

    There are many different types of auctions. In some of them bids are open, that is all bidders can see all bids, while in other situations, such as sealed contract bids, they are closed.

    Here are some of the most common types of auction.
    • English auctions, also known as an open ascending price auctions, is most common. The expired and user auctions most common in the domain world at sites like GoDaddy Auctions, NameJet, Sedo, Flippa etc. follow this format, as do most of the auctions here on NamePros.
    • Dutch auctions, also known as open descending price auctions, start at some value which is decreased until a bid is made. NameLiquidate is an example of a domain auction built on this format.
    • Sealed first-price auctions, also known as blind auctions have various bidders place one binding bid each, without knowledge of bids by others. At the end of the set period, the highest value bid wins. While only rarely are domain names sold precisely by this model, when brokers or investors announce a set period for collecting qualified offers they are somewhat following this model.
    • Vickrey auctions, also known as sealed-bid second-price auctions, are similar, except the winning bidder pays the second highest price. For example if bids of $500, $2500, $4500, $4800 and $5500 were received, the person who submitted the $5500 bid would win, but they would only need to pay $4800.
    There are other aspects that differentiate auctions, such as whether they are for a single object, or for a set of objects. While most domain auctions are single domain, sets can be auctioned on NamePros and on other platforms.

    Combinations are also possible. For example an Amsterdam auction starts as an English auction, but then in later stages the last two bidders submit a sealed closed bid. Under a certain set of assumptions, the Nobel Laureates were able to show that English and Dutch auctions can be equally effective.


    Which Is Best?

    While auction theory is concerned with optimization, the question arises, optimization for whom? Is the goal to have the domains, or whatever is being sold, sell for the highest price, benefitting the sellers, or the lowest price, which would favor the buyers? Or is there some broader goal of selling as close as possible for the “right” price. The best might also involve questions of efficiency in the bid process.

    This year's Nobel Prize winners contributed significantly to our understanding of auctions, including ideas directly applicable to domain names. It turns out that bidders tend to bid less than what they consider the true common value of the object.
    Common value refers to a universal value felt to apply to the domain or other object, while private value is the value, or perception of value, specific to that bidder, but different from other potential bidders. For example, a business with the exact name of a domain name has a higher private value than the same name would have to other bidders. A bidder with a unique insight about a domain name may hold a different private value from other bidders as well.


    The Winner’s Curse

    Three petroleum engineers coined the term winner’s curse in a 1971 publication that showed that companies winning auctions for petroleum exploitation rights tended to do more poorly than other companies. The idea of the winner’s curse is that the winning bidder has the most optimistic view of worth, and therefore overbids.

    Let’s take a specific example of a short generic domain name that would be regarded as having value to a large number of different potential end users. That is, many domain investors should see a similar common value worth. But domain names, each being unique, would be expected to show some variation in perceived worth. Let’s say the top bids by different bidders are $12,000, $8,000, $15,000, $5000, $10,000. The winner who paid $15,000 is likely to have overpaid.

    But wait, didn’t it say above that most bidders pay less than the real common value worth? That is true, at least according to models, so most of the bidders did indeed bid less than they really think the true value is, because they did not want to end up with the winner’s curse. But the highest bidder may have bid too much.


    How To Get More From Auctions

    If we compare open and closed auctions, which will yield better revenue for the sellers? Not surprisingly, the more information on bids and bidders is shared, the better it will be for sellers. If you see that others, whose judgement you respect, have placed high bids, it will encourage you to consider increasing your own bid. This is how the Nobel committee summarized Paul Milgrom’s contribution.
    This suggests that the more open the domain name auction format is in revealing bids and bidder identities in real time, the better the auction will be for domain sellers.


    Reserve Or Not?

    Within domain auctions, one of the key questions is whether a minimum sales price, or reserve, is set, and if so whether the reserve is shared. There is also the issue whether the reserve is fixed, or whether the seller or auctioneer can lower it as a result of seeing the bids submitted. On many platforms the reserve price is not the same as the opening bid level.


    Buy-It-Now Option

    At NamePros, and some other domain auction platforms, there is normally a buy-it-now price set, and anyone can select that and end the auction. Many leave this unspecified at the start, or adjust it in response to submitted bids. A well selected buy-it-now price can help you get a few extra dollars for the domain name, and close auctions faster.

    Sometimes other options are offered, such as including a logo, or perhaps another domain name, if the price reaches a certain level.


    Principles For Domain Name Auctions

    There has been much discussion over many years on NamePros about domain auctions, many concerned with proven or assumed cases of wrongdoing, and frustrations over perceived lack of fairness. In reading these discussions, the following points struck me as important.
    1. Trust. Do bidders have trust in the platform? This includes financial stability to integrity and due process when disputes arise.
    2. Transparency. For good reason, many are wary. Anonymous bidding contributes to concerns. But are bidders willing to give up their own anonymity?
    3. Fairness. Access should be equal, and some bidders should not be favoured through automated access not available to others. Should robotic bidding be allowed?
    4. Efficiency. Most domainers want the platform to make it easy to bid, or place names in auction, and follow-through after auction fast and efficient. Auctions which are not binding lead to frustration.
    There are other issues, such as should there be the closing time extensions, and what time length in general should auctions have.


    Are Auctions More Than Buying And Selling?

    All types of auctions can be an interesting and fun way to interact. Certainly the live auction at NamesCon was one of the most attended and anticipated parts of the event. The Domain Social auctions have been lively and interesting exchanges. Are there ways we can make NamePros auctions more lively and interesting, while staying within the rules that are in place to assure accuracy and fairness?


    More End User Auctions?

    As noted earlier, auctions are in widespread use in modern society. Has the domain community under-utilized auctions as a way to connect domain names with those who could value from them? What would a scaleable, efficient and widely-accepted retail auction platform for domains look like?


    Just to be clear, to my knowledge, the Nobel Prize economists have not written specifically on the topic of individual domain name auctions (see update below). However, I think some of the principles that they helped illuminate can find application in domain auctions. If you want to read more of their work, here is the summary intended for the general public, while there is also a full technical explanation.

    UPDATE: Dr. Wilson was one of the authors of a paper which helped inform the ICANN auction process for the awarding of some new extensions to registries. You can read the paper here.

    Note:
    Strictly speaking, what we refer to as the Nobel Prize in Economics is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, and was not part of the original Nobel Prizes. It has been awarded since 1969, and is administered by The Nobel Foundation. Most consider it on an equal footing with the other Nobel Prizes.
     
    Last edited: Oct 14, 2020
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  4. Bob Hawkes

    About The Author — Bob Hawkes

    Domain analyst, writer and informal educator, with particular interests in domain name phrases and non-business uses for domain names. I am a risk averse domain investor who only invests modest amounts in a variety of extensions and niches. Don't hesitate to contact me - I like to help!

    This is Bob Hawkes's 61st blog post on NamePros. View all blog posts

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  5. Comments (28)

  6. Sutruk

    Sutruk Top Contributor VIP

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    Great article as always Bob! Very detailed and well explained! This time about the Auction world!
     
  7. Alan Dunn

    Alan Dunn NameCorp VIP ICA Member ★★★★★★★★★★

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  8. CraigD

    CraigD 360promo.com VIP

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    Great well researched post @Bob Hawkes

    From what I have been reading on NP recently, one of the biggest issues currently affecting domain auctions - which you have covered under 'Principles For Domain Name Auctions' - are auctions which are not binding.

    Thanks again for an insightful article!
     
    Last edited: Oct 14, 2020
  9. The Durfer

    The Durfer Top Contributor VIP Gold Account

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    great article, learned something new today. Ty, Mr. Bob. :)
     
  10. topdom

    topdom Top Contributor VIP

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    Peace, economy, literature Nobels are politically biased in general. Previous POTUS was given peace Nobel just to make sure he doesn't start ww3, and still, he tried to (or someone forced him to..).
     
    Last edited: Oct 14, 2020
  11. Bob Hawkes

    Bob Hawkes Top Member NameTalent VIP Gold Account Trusted Blogger

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    Alan,
    Thank you so much for the addition! I am still in the edit window on the blog post, so provided an update with the link to the article.
    Bob
     
  12. Mike Goodman

    Mike Goodman Established Member

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    How easily politics enters every debate. Bob, there is no such thing as a Nobel Prize for economics. The Nobel Foundation simply does not recognise, correctly in my view, economics as a discipline.

    There are so-called Nobel Laureates, not recognised by the Nobel Foundation. The foundation awards Prizes, not Laureate status.

    The laureate system is a separately organised institution set up buy a billionaire funded organisation which calls itself the Mont Pelerin Society to recognise academic economists pushing their neoclassical "research" findings in support of a specific political philosophy.

    The MPS was founded in 1947. The underlying thesis is BS and the "laureates" are BSers. Armchair theorists who propose theories without tested or empirical evidence.

    The Nobel Foundation was founded in around 1901. The first "Nobel Laureate" was named in the 1950s. The Nobel Foundation has tried several times to have the laureate system abusing its name banned but it is based in another country which will not cooperate.

    The laureate system is, nevertheless, in my view fraudulent in that it uses the Nobel name without any relationship to it whatsoever.
     
    Last edited: Oct 14, 2020
  13. Mytz.com

    Mytz.com Top 4L [email protected] IEIE.com CUTU.com NESU.com KKIK.com VIP Gold Account

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  14. WatchDogue

    WatchDogue Top Contributor VIP

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    That is a great overview of the history of auctions and, the variety of auctions one may participate in.

    The auction world and the domain name world seem like a natural pairing and these days there are so many auction formats in which domain names appear.

    Thanks Bob, for the great presentation of domains and auctions!
     
  15. unmark

    unmark Established Member ★★★★★★★★★★

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    Superb article Bob, top class! Very well written and explained.
     
  16. CraigD

    CraigD 360promo.com VIP

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    I understand that it is known officially as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (the same award shared by John Nash for his game theory in 1994).

    I suspect that Alfred Nobel may be turning in his grave knowing that his 'prize' is being awarded for disciplines that benefit financial gain.
     
    Last edited: Oct 15, 2020
  17. Bob Hawkes

    Bob Hawkes Top Member NameTalent VIP Gold Account Trusted Blogger

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    @Mike Goodman not sure if you missed my note that was at the bottom of the original article. The funding for the prize came from a Swedish bank, but it is administered, announced and awarded along with the others, although with its formal name given in my note.
    I had thought the controversy would be whether anything meaningful in auction theory could be applied to domain name auctions, but I guess simply the mention of Nobel can bring controversy!

    Perhaps, although his fortune was amassed through applying chemistry to make explosives and weaponry, so I think making of money from science would not bother him too much!

    By the way, as the story goes by mistake Nobel’s obituary was published and he read it (mixup of names with someone else who had died). He did not like to be remembered as written, so changed his will to leave 94% to fund the Nobel Prizes.

    Bob
     
  18. CraigD

    CraigD 360promo.com VIP

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    Thanks Bob :)

    Le marchand de la mort est mort ("The merchant of death is dead")
     
  19. eyedomainous

    eyedomainous Top Contributor VIP ★★★★★★★★★★

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    The frequency spectrum auction is actually a very apt analogy for domain name economics... as the spectrum is the (mobile) namespace, and the Gov (domainer) 'hand regs' the frequencies it auctions.

    Of course, when selling... you want an open, competitive, auction market.
    But, when buying... you want a non-competitive fixed-cost market.

    This is why quality 'hand regs' often make the most sense.
    Especially considering, every domain in the after-market is a hand-me-down reg.
     
  20. Mike Goodman

    Mike Goodman Established Member

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    The important point for me is that the people who dreamt this award up were supporting the Neoliberal political thesis and that in turn borrows its intellectual support from neoclassical economic theory. The latter is based upon such improbable assumptions that no scientist would acknowledge it as a proper academic discipline. I could go on at great length. Suffice it to say at this point that I have very little respect for researchers prepared to sell their souls on that particular alter.

    My tendency is to dismiss that whole Swedish laureate nonsense out of hand.

    In contrast, I am not saying Nobel himself was a saint. He made his millions in dynamite and munitions. But that is not the point.

    For a very interesting discussion of how blockchain theory may change the future of auctions, with no mention of economists or economics, the Domain Sherpa review of 5th October (10 days ago as I write this) is well worth visiting.
     
    Last edited: Oct 15, 2020
  21. FolioTeam

    FolioTeam AMDB.tv VIP

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    Learnt something new today. Thanks for sharing
     
  22. Dotorium

    Dotorium Upgraded Member Gold Account

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  23. premkumar

    premkumar Top Contributor VIP

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    Their is so many thing in economics, giving Nobel prize for Auction practice just create question on Nobel prize and it value in current world. Nobel prize for Obama, Now this one. Is this biased or Nobel prize is for sale? Their is many cases were private companies / individual/ NGO's used best practice like economy of scale and other practices that helped people to get service/product that they can't get it otherwise.

    Some example from my country:
    1. Aravind eye hospital: They do 300K Cataract eye surgery every year and most of them done for free of cost. Their Assembly line surgery is very successful and not only that, they make little profit too. several million people got back my eye sight thanks to them

    2. Their is another guy who helped women groups to manufacture Sanitary Napkins & Pads and sell it for 5 cent, which helped millions of poor and rural women able to offer sanitary pads. And also Self help women groups which made this pads got small income. Here too the concept of distributed manufacturing, use of housewifes(who are not productive or making any income previously) as manufacturers and using the self help group itself as mean to sell the product to end users (eliminating dealer, middle man commission)

    I am sure, if i can point out of couple of them, across of the world so many people who used different Economic model for great good can be easily found and be recognized.
     
  24. s.g

    s.g Supercalifragilisticex- pialidociously COOL Gold Account

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    Probably the best article of the month, perhaps of 2020.

    I subscribe to several newspapers like The Times and NY Times but you beat them at explaining the historical and modern auctioning systems and their advantages, profitability and other contextual points. So much clarity and understanding in just a few minutes of reading time.

    Thank you.
     
  25. Wings

    Wings Established Member

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    Thanks for sharing, I learned a lot from your post. Bob
     
  26. The Durfer

    The Durfer Top Contributor VIP Gold Account

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    i know, right, he should freelance for his local news company or something. wow. :)
     
  27. CraigD

    CraigD 360promo.com VIP

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    I just came across this op-ed on TheConversation.com concerning economists and the recent Nobel awards - it's worth a read.

    Economists are more like storytellers than scientists - don’t let the Nobel for ‘economic sciences’ fool you
    October 11, 2020 3.29am AEDT

    "... although economists have historically wanted their field to be associated with the so-called hard sciences – a conjuring act exemplified by the Nobel Memorial Prize in Economic Sciences – I’ve come to see it as having a lot more in common with literature, especially novels, than physics or chemistry."

    https://theconversation.com/economi...e-nobel-for-economic-sciences-fool-you-147722
     
    Last edited: Oct 20, 2020
  28. lock

    lock DomainUsed.com VIP

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    Shill bidding gets the prize. Hardly nobel as we all have had problems with auctions. But newsworthy and relevant and thank you for the post.
     
    Last edited: Oct 20, 2020
  29. Mike Goodman

    Mike Goodman Established Member

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    My point exactly, @CraigD. I wasted three years getting a degree in economics. I finished it with the same questions I had when I started still unanswered. Such as, scientists use assumptions in order to have something to work on, then dismiss or amend them as they learn more. Why have we been using the same, utterly unbelievable and impractical, assumptions for more than 200 years (now 250 years or so - I graduated in June 1980)?
     
    Last edited: Oct 20, 2020
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