What is a market? What does it mean to design it?
This book is a beautiful compilation of real life stories about “market design” by a fascinating storyteller, an exemplary academic, and among other qualities 2012 Nobel Prize Winner in Economics, Alvin E. Roth.
A market is generally thought of an abstract setting where demanded and offered amounts of a particular product or service are being traded. Furthermore most of the time the first medium that comes to one’s mind through which this trade occurs is the price mechanism. Roth quotes the 19th century economist William Stanley Jevons, who “points out that the invention of money was a market design solution that overcame a major problem that severly limited barter, namely the need to find someone who both has what you want and wants what you have”.
However, money is not a “good” design solution to all markets or not good enough. So it is a solution to some markets and also a “partial” solution to many others. For instance, think about situations where resources are not (or better not be) allocated via a price mechanism, or situations where money alone is not enough to solve a problem. More concretely, Roth considers in particular the following cases: the assignment of children to schools, kidneys to patients, and interns to hospitals. And in all these situations Roth takes the reader to a wider world of markets, where the matching of the offering and demanding sides of the markets need more than the price mechanism.
Market Design literature can be hard to grasp for outsiders and non-academics. It is indeed quite ezoteric in its expressions. However, apart from his seminal theoretical contributions to the literature, Roth has also spent years in successfully implementing the theory with bureaucrats to real life problems ranging from intern-hospital matching to chains of kidney exchange. This rare aspect perhaps makes him a master of transforming complicated theories into understable and practical real life solutions and design. His craftmanship in applications of the theory and his power of expression also make this book both academically and intellectually thought provoking while at the same time still very accessible to a wide range of audience.
The book is full of short stories, examples of markets, of success and of failure, of the good, the bad and the ugly design. Roth provides answers and examples to a very important question “why markets thrive or cease to exist”. The answers provide insight as to how we can “make markets smarter, thicker and faster”.
Assume you are an entrepreneur who is about to begin his first start-up. Funding acquired, network established, and your mom’s blessing. Or maybe you are a bureaucrat at the ministry of education in charge of regulating allocation of students to high schools, or universities. Perhaps you are a policymaker in telecommunications sector? You have the right technocrats, educated and experienced, and the support of the parliament. What can go wrong?
Through the insight gained in his research in market design without price mechanisms, Roth shows in this book that actually a lot can go wrong. The markets (in the broadest sense), may not give sufficient stimuli to create the participation, also referred to as thickness, of the agents in the markets. Or thickness is sometimes achieved, but perhaps with an unpleasant by-product, congestion, in the sense that market participants cannot be served quickly enough. It may also be that the markets are not safe enough to do business. Or all the safety regulations and other bureaucracy make it too complex and not simple enough for the participants to engage in it. Roth explaines with various examples like how companies such as airbnb.com created “thickness”, or how Uber solved the “congestion” problem. How PayPal solved the payment privacy problem for eBay and hence ensured the “safety” of the market. These markets evolved through design, just like Lydians once designed theirs, by introducing coins!
All in all Roth provides a very strong insight on how to design markets smarter. Whether you are a new entrepreneur ready to run his business, or a policymaker in regulating a market, or a marketing manager in a company, you would really be better off by reading this book. You may avoid some of the mistakes and you may bring up some nice design solutions to your problem.
(This review has originally been written in Dutch for the ESB magazine with huge linguistic support from Ingrid Rohde. The Dutch version in the ESB magazine is freely accessible here. Though at times, it doesnt work So check it here or here at the dropbox link)