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.
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.
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.
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.
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.
This year’s Laureates, Paul Milgrom and Robert Wilson, have studied how auctions work. They have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies. Their discoveries have benefitted sellers, buyers and taxpayers around the world.
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.
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.Wilson showed why rational bidders tend to place bids below their own best estimate of the common value: they are worried about the winner’s curse – that is, about paying too much and losing out.
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.Paul Milgrom formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder. He analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding.
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.
- Trust. Do bidders have trust in the platform? This includes financial stability to integrity and due process when disputes arise.
- Transparency. For good reason, many are wary. Anonymous bidding contributes to concerns. But are bidders willing to give up their own anonymity?
- Fairness. Access should be equal, and some bidders should not be favoured through automated access not available to others. Should robotic bidding be allowed?
- 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.
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.
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