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The rules make the sport safe enough to attract competitors but don’t dictate the outcome. In just this way, marketplaces, from big ones like the New York Stock Exchange to little ones like a neighborhood farmers’ market, operate according to rules.
The farmers’ market near my old home opens at a fixed time, and if you happen to come a bit early, vendors hesitate to sell you so much as a raspberry beforehand. If they did, they would incur the wrath of their fellow merchants, who worry that if some vendors started to sell before the market officially opened, some customers would come earlier, and an afternoon market could unravel to become an all-day market, requiring the vendors to spend more time selling in a “thinner” market.
This meant that the railroads could mix wheat of the same grade and type instead of keeping each farmer’s crop segregated during shipping. It also meant that over time, buyers would learn to rely on the grading system and buy their wheat without having to inspect it first and to know whom they were buying it from.
In 1999, for example, Coca-Cola tested vending machines that could automatically raise prices in hot weather. The backlash was quick — and the company abandoned the idea just as quickly.
If you know a recent college graduate who recently took a job with a big investment bank such as Goldman Sachs, there’s a good chance that she’ll get a call soon after beginning work. It will be from a big private equity firm such as Kohlberg Kravis Roberts, interested in signing her to a contract that would take effect after she’s worked for Goldman for two years.
But the firms that made early offers prevented this by making their offers exploding — that is, take-it-or-leave-it offers of such short duration that they didn’t leave enough time for another firm to jump in and compete for the same candidate, or for a candidate to get another offer for comparison.
To put it another way, exploding offers make markets thin as well as early, and so participants are deprived of information about both the quality of matches and what kind of matches the market might offer.
Unfortunately, it’s hard to make rules constraining lawyers, because many lawyers earn their living by obeying the letter of the law while evading its intent.
And some marriage markets are tougher than others. Consider the teenage Bedouin bride in whose community polygamous marriages are common. Just such a woman lamented, “If you are 20 or older,
A lot of people eventually married their high school sweethearts, because high school provided a thick marriage market in which one could find a lot of single people of the opposite sex, and those opportunities wouldn’t be so abundant later.
Today the growth of Internet dating sites also offers the possibility of a thicker marriage market for college graduates. Postponing marriage when there is still a thick market in the future isn’t so risky, and more-mature brides and grooms might have a better chance of recognizing a good match.
For example, many selective colleges now fill more than half of their freshman slots through “binding early admission,” a kind of exploding offer in which students apply early and commit to attend that school if accepted,
Almost all American universities have agreed that students shouldn’t have to accept their offers before April 15 of each year. If students are pressed to accept an offer before that deadline, they can accept and then later decline, in order to accept another offer before that date. This single rule has virtually eliminated all exploding offers for Ph.D. candidates in the United States.
But that year, a company called Spread Networks spent hundreds of millions of dollars to build a high-speed fiber-optic cable that went in a much straighter line and cut round-trip transmission of information and orders from 16 milliseconds to just 13. That 3-millisecond differential basically meant that only traders who used the new cable could make a profit by trading on momentary price differences between Chicago and New York.
Building a better mousetrap isn’t always rewarded when the mice have a say in the matter.
I mention this because part of market design involves recognizing that good ideas may not be enough on their own to fix a market. It’s often also necessary to gather broad support from participants to get those ideas adopted and implemented.
After the cable was completed, price information could cross the Atlantic in a day. As a result, cotton shipments began to more closely match the fluctuations in the market, and prices on the cotton market became less volatile. Before the undersea cable, it was harder to match supply with demand because the news that arrived in New York was already more than a week old — slower than the pace of events even in that era. Speeding up the news let traders react to the market better.
The D.C. Circuit, the most prestigious in the country, had the most to gain from hiring students as late as possible. It was the last to abandon the rules intended to promote later hiring, and it was eager to restore those rules in the future — not just out of fairness, but because it stands to gain the most from an orderly market.
The essence of an exploding offer is not that it expires quickly, but that it forces the recipient to respond before receiving any other offers. As
Instead, they made a kind of slow-motion exploding offer, by essentially kidnapping the students to whom they had made early informal offers. For example, they scheduled mandatory events on the days when civil service exams were held. If a student didn’t come to the company event, he wouldn’t be given the promised offer when the day for official offers came.
(By the way, speed is becoming important to eBay, too. Whereas most items were originally sold by auction, today most are sold at a fixed price. That’s a faster way to do business, because you can buy what you want as soon as you want it, without having to wait for an auction to end — and taking the chance of losing and having to try again in another auction.)
This risk of robbery and physical harm still exists today in some markets, particularly in illicit ones, such as those for illegal drugs and sex, where buyers and sellers often meet furtively in isolated, poorly policed places.
Of course, you have to trust eBay to use the information as it promises (and not just charge you the highest price you’re willing to pay however the bidding went). Since this kind of trust is essential to eBay’s business model, I’m not surprised that I’ve never heard any suggestion that eBay has ever abused it.
When I studied this and other successful labor market clearinghouses, I discovered one of the secrets of their success. It was that they produced outcomes that were stable, in the sense that no applicant and residency program not matched with each other preferred each other to their assigned matches. If a suggested
Medical students are pretty busy, but one thing they can sometimes manage to do along with their studies is court their classmates.
How come? I think of this as an illustration of what I call “the Iron Law of Marriage,” which says that you can’t be happier than your spouse.
And if there’s one thing we’ve learned about flawed markets, it’s that people flee from them, either physically or by resorting to back channels and black markets. Either way, flawed markets can undermine not just communities but whole nations. The Berlin Wall was a monument to that fact.
Something very similar happens at many Internet dating sites. Attractive women get more emails than they can answer. The men, who find that many of their emails go unanswered, react by sending more emails. Moreover, these emails become less informative, because the men submitting them are less likely to study the information contained in each woman’s profile and how best to approach her. The women in turn reply to a smaller and smaller percentage of the messages they get, and the men respond by sending even more, and even more superficial, messages.
An email whose subject line is “I love you” means little when it is sent to many recipients.
(Evolutionary biologists refer to the “four Fs” of natural selection: feeding, fighting, fleeing, and, um, reproduction. A large tail is a “handicap” in the first three categories, which sends a signal about his underlying fitness, and that increases his opportunities in the fourth.)
(Mutual interest is what separates courting couples from stalker and prey.)
Because that long line sends a signal that the restaurant across the street with empty tables can’t easily mimic — that is, a lot of people think this is a good restaurant, worth waiting for, and if you haven’t tried it, maybe you should get at the end of the line instead of going across the street.
The only country in which it is legal to buy and sell kidneys from living donor/sellers is the Islamic Republic of Iran. Legal markets were permitted there after the need for kidneys spiked during the Iran-Iraq War. Kidney donor/sellers in Iran also receive exemption from military service.
The markets we try to ban, repugnant markets, are precisely those that some people willingly take part in despite others’ opposition. People wanting to transact with one another is a powerful force. The same force that has made markets an ancient and pervasive human activity also leads to black markets springing up where legal ones are prevented.
Markets are human artifacts, not natural phenomena. Market design gives us a chance to maintain and improve some of humanity’s most ancient, essential inventions.
