How Goethe figured second price auction much before William Vickrey…

I just learnt how Fisher figured the Philips Curve before AW Philips.

Now this gem by Avinash Tripathi tells us how the famous German polymath Johann Wolfgang von Goethe figured second price auction way back in 18th century:

Johann Wolfgang von Goethe (1749-1832) was arguably the greatest German writer, poet and polymath of the Romantic era. His forays in science, diplomacy, literature etc are well-known. His dabblings in the applied economics and auction design are less known however.

One incident in particular is worth mentioning. While selling the publishing rights of his epic poem ‘Hermann and Dorothea’, Goethe had made an intriguing proposal to his publisher. According to this proposal, Goethe would submit his reserve price in a sealed envelope. The publisher was asked to quote how much he was willing to pay for the publishing rights of this poem. If the price quoted by the publisher turned out be greater than the reserve price asked by Goethe, the deal would be finalised. The publisher would get the publishing rights of ‘Hermann and Dorothea’; Goethe would receive the amount he asked (not the amount the publisher quoted) as royalty.  If the publisher’s quote turned out to be lower than Goethe’s reserve price, the negotiation would be broken and there would be no deal.

For many decades, this proposal remained a mystery. Why conceal your reserve price in a sealed envelope? Why not state it upfront and make a ‘take it or leave it’ offer to the publisher? And once the publisher has indicated a much higher figure, why settle for the lower reserve price as royalty? Few were able to solve this puzzle. The consensus was that the entire scheme was whimsical and devoid of any logic.

Read the whole thing where Avinash explains how modern auctions based on game theory helped understand this puzzle. William Vickrey even won the Nobel Economics for this becoming the only person in economics to win the award posthumously. The award was announced on 8th October and he died just three days later on 11th October.

I mean there is so much economics to learn from general literature. And here we have someone who actually designed the auction only to fail as he could not figure the integrity of the auctioneer. Read the article for more details.

 

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