Starting in 2004, R. Preston McAfee is the J. Stanley Johnson Professor of Business, Economics and Management at the California Institute of Technology. He teaches business strategy and managerial economics.
From 1997 to 2003, McAfee was the Murray S. Johnson Chair in Economics at the University of Texas at Austin. From 1990 to 1997, McAfee was the Rex G. Baker, Jr., Professor of Political Economy at the University of Texas. McAfee is the author of over sixty articles published in scholarly economics journals, many of them on auctions and bidding, and co-author of a book Incentives in Government Procurement. McAfee served as one of four economists who edit of the American Economic Review, the most prominent economics journal, for over nine years, and serves as an associate editor of the Journal of Economic Theory. He is a Fellow of the Econometric Society, and served as department chair for 1997-8. McAfee taught business strategy at the University of Chicago's Graduate School of Business in 2000-1, and is the author of Competitive Solutions: The Strategist's Toolkit, published by Princeton University Press in 2003.
McAfee is a recognized expert in industrial organization, and has been hired as a consultant by the U.S. Department of Justice, Antitrust Division and the Federal Trade Commission. McAfee has advised on matters concerning mergers, collusion, price-fixing, electricity pricing, bidding, procurement, sales of government property. In 1995, McAfee extensively advised the Federal Communications Commission on the design of auctions for spectrum to be used for personal communications services. Recently, McAfee advised the Federal Trade Commission on the mergers of Exxon and Mobil, and BP and Arco, and testified in the FTC v. Rambus.
Before joining the University of Texas, McAfee was a visiting professor at the California Institute of Technology and a professor at the University of Western Ontario. McAfee received the Ph.D. in economics from Purdue University in 1980, Master's degrees in both mathematics and economics in 1978, and the Bachelor's degree in economics, summa cum laude and Phi Beta Kappa, from the University of Florida in 1976.
McAfee has been extensively involved in the creation of markets to replace government administrative procedures, including sale of the use of the radio frequencies, and the establishment of a marketplace for electricity. The U.S. Federal Communications Commission used to allocate the use of the radio spectrum by administrative procedures. In 1994, Congress authorized the FCC to use auctions. After an extensive public debate, the FCC chose an auction designed by McAfee, Paul Milgrom and Robert Wilson, the latter two being professors at Stanford University. This auction is designed to replicate marketplace transactions and to insure market outcomes. It's novelty arises from the simultaneous sale of multiple items. The problem facing bidders is that it is difficult to bid on one item without knowing the final sale prices of the other items. The simultaneous ascending auction solves this problem by employing rounds of bidding on all items simultaneously, with prices ascending, so that no item is sold until the bidding is finished on all the items. The auction has raised over $17 billion for the Federal Government.
McAfee, Milgrom, Wilson and John McMillan formed a company, Market Design, Inc., that assists governments in the sale of assets such as radio frequencies, mineral rights, airports, and other assets. The company designs market mechanisms for the transactions, which insure that a market price is paid for the asset. The company is involved in sales in Australia, Canada, Mexico, New Zealand, and Peru at this time. In addition, the company is involved in the creation of a free market for electricity. Historically, electricity has been operated as a government-regulated monopoly in most regions. Now, electric companies are selling their generation capacity, and a market for electricity is being created. In California, this market will involve over a thousand suppliers and a thousand buyers. The main problems facing the market design include the need to coordinate (a single supplier can bring the entire grid down), the need for emergency backup supply, and power losses associated with long distances.
McAfee has a long-standing interest in market mechanisms. His 1988 book, Incentives in Government Contracting, co-authored with John McMillan, investigates and promotes the privatization of government-supplied goods and services. Many of McAfee's articles involve the design of auctions to solve procurement problems - a method of relying on the market for goods and services usually supplied by the government. For example, in a recent article accepted for publication by the Journal of Political Economy, McAfee, writing with Col. Richard Fullerton of the Air Force, investigates methods of auctioning the right to participate in design projects for major weapons systems such as aircraft. In such contests (called tournaments), a few firms compete with quite expensive designs. The paper shows that in many circumstances, auctioning the right to participate in the design tournament saves the government a considerable amount of money.
McAfee's interests in employing economics in the business arena extend to teaching at the University of Texas. In addition to teaching industrial organization at both the graduate and undergraduate levels, McAfee was instrumental in the design of the Business Economics Program, which combines basic business tools with an economics major. This program has been very successful at attracting high quality economics majors and preparing them for the business world, as judged by the students' success in obtaining jobs.