Have you ever looked for a job? Bought a house or a car? Invested in the stock market? If you’ve done any one of these, you’ve participated in a market.
And when we talk about markets that’s where terms like supply and demand come in: How many people am I competing with for that job? How many homes or cars are available in my price range? How many shares can I afford to buy?
For most of us, markets are an afterthought. We participate in them, but we don’t see ourselves as shaping them in any way. While they’re known to evolve over time, they’re not seen as systems we intentionally design. That is, until recently.
Three Elements of Market Design
Alvin Roth, a Nobel Prize winning economist at Stanford, has spent his career studying markets. In particular, he’s studied why they fail. And in the process of figuring this out, he’s learned what makes them succeed.
And that’s where his work in market engineering – deliberately designing markets – began. Roth captures this innovative approach in his latest book Who Gets What — and Why: The New Economics of Matchmaking and Market Design.
What Roth and his colleagues learned was that when markets have three key elements, they thrive (conversely, when one or more are absent, they often fail):
- The market is “thick,” meaning there are lots of buyers and sellers.
- Transactions between buyers and sellers are “quick.”
- The market is “safe and trustworthy”: buyers and sellers can safely exchange payment information for the timely receipt of promised goods and services.
Roth and his research team applied these insights to improving the ways kidney donors connect with recipients, public school students select high schools in New York City and Boston, and medical school students access residency programs. Roth and his teams did this by engineering efficient market clearinghouses in each of these areas.
Their work has revolutionized the experience for “buyers” (kidney recipients, high school students and families, and medical students) and for “sellers” (kidney donors, schools, and hospitals). And it’s because Roth and his colleagues were able to see markets as “. . . human artifacts, not natural phenomena.” They viewed markets as ripe for innovation.
Why Should We Care?
Roth’s work is important for two reasons. First, it gives us a framework. Roth’s insights help us understand how the combination of mobile technology and the above three market elements have helped some of today’s most ambitious companies become so successful: “. . . [C]omputers and smartphones have helped Uber and Airbnb build multibillion-dollar businesses by making those markets thicker and quicker, bigger and less congested.”
Second, this three-point framework gives us hope for designing markets that benefit more people in consistently reliable ways. Sooner or later, self-evolving markets fail. And when tech bubbles and housing bubbles burst or stock markets crash, they tend to impact those who can least afford it the hardest.
What if, instead of passively responding to markets, we could design new ones or redesign old ones to overcome risks and failures? What if this rethinking helped us avoid or guard against housing bubbles and stock market crashes?
As we start to understand better how markets and marketplaces work, we realize that we can intervene in them, redesign them, fix them when they’re broken, and start new ones where they will be useful. The growing ability in recent years of economists to engineer is a bit like the epochal transformations that farming or medicine have experienced over the millennia.
If you could engineer a new market or redesign an old one, what would it be?