The 2020 Nobel Laureates for Economics, Paul Milgrom and Robert (“Bob”) 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.” (nobelprize.org)
The layperson might have got only an imprecise clue of the relevance of the auction machinery for the 3G spectrum auctions frenzy during the 1995-2005 decade. Tens of billions of euro flooded into governments’ pockets in the US and in Europe. Mind you, not all auctions met the initial optimistic expectations. The reason is simple. There is no one-size-fit-all solution! (copyright by Paul Klemperer, Oxford University) In other words, design matters. Design depends upon many factors: the nature of object (a slice of the radio spectrum would seem fairly different from a bus route), the characteristics of relevant market, the presence of incumbent(s) etc..
Believe it or not, this lesson can (in fact, should!) be safely applied to procurement design, be it private or public. One of Peter Smith’s main messages in his lively “Bad Buying” is that “the devil is in the details” (okay, not sure he has actually written this sentence…). In a reader-friendly and entertaining style, he (sort of) intuitively makes use of the main achievements of the last 40 years of auction (and contract) theory into a critical analysis of some (of the) rough(est) mistakes in procurement design (and implementation).
Let me mention one simple example borrowed from my own experience in public procurement. The primary role that policy makers around the world give to small and medium enterprises (SME’s) keeps inducing some procurement “experts”, including well established academics, to preach ex cathedra that centralised solutions such as framework agreements and the devilish (again him! or her?) organizations implementing centralized procurement solutions, that is, Central Purchasing Bodies, are the icons of all evils, inflicting (economic) pains to SMEs as well as triggering the most dreadful anticompetitive outcomes. Well, I am not nourishing the illusion that such “experts” invest much of their research time trying to decipher Milgrom’s and Robert’s seminal papers. They are not definitively accessible to everybody, a hell (again!) of math is needed. However, the Nobel laureates’ experience as global consultants in auction design has convinced them to write policy papers in plain, accessible English language to warn to-become auction practitioners: Design matters! Solutions are neither “bad” or “good” per se. (please don’t forget, though, to have a look at Prof. Paul Klemperer’s –University of Oxford- and Prof. Ken Binmore’s -University College London- nontechnical writings on auction design as well).
Deep and hard thinking is needed, coupled with the humility of adapting solutions adapt to evolving circumstances.
