Who Gets What — and Why: The New Economics of Matchmaking and Market Design

by Alvin E. Roth

Matching is economist-speak for how we get the many things we choose in life that also must choose us.

A market involves matching whenever price isn’t the only determinant of who gets what.

Efforts to keep markets thick often concern the timing of transactions. When should offers be made? How long should they be left open?

Congestion is a problem that marketplaces can face once they’ve achieved thickness. It’s the economic equivalent of a traffic jam, a curse of success. The range of options in a thick market can be overwhelming, and it may take time to evaluate a potential deal, or to consummate it.

Although it’s great to have a marketplace that gives you an abundance of opportunities, these may be illusory if you can’t evaluate them, and they can cause the market to lose much of its usefulness.

What often makes matching markets especially challenging is that everyone has to puzzle through not only their own desires but also those of everyone else and how all those other market participants might act to achieve their preferences.

Every market has a story to tell. Stories about market design often begin with failure—failure to provide thickness, to ease congestion, or to make participation safe and simple.

Turning a market into a commodity market helps make it really thick, because any buyer can buy from any seller, and any seller can sell to any buyer.

Sellers enjoy selling in a thick market of buyers, but they don’t enjoy being interchangeable with other sellers. Giant brand leaders such as Apple and Microsoft sell products that are enough like commodities that you don’t care which particular iPhone or copy of Microsoft Office you have, but they are different enough that you can’t buy the same phones and software from anyone else.

Buyers have some of the same ambivalence as sellers: while we like the fact that some goods are commodities that we can buy without inspecting, we also enjoy variety and seek out unusually high and hard-to-standardize quality.

The thickness of the Amazon marketplace—the ready availability of so many buyers and sellers—is self-reinforcing. More sellers will be attracted by all those potential buyers, and more buyers will come to this marketplace because of the ever-expanding variety of sellers.

we pay a cost for the convenience of using a middleman, and that is partly because the middlemen—in this case, the credit card companies—compete for our business in a way that mutes the price competition among merchants that might otherwise bring prices down.

Withholding easy-to-match exchanges is a common temptation in markets with middlemen.

That’s one of the dangers associated with early transactions: they can come well before important information is available. And that can mean bad matches made and good ones missed.

Exploding offers are common in unraveled markets. These offers are both early and short-lived. So not only are firms making offers before they have as much information as they’d like about how candidates might perform in school, but the candidates themselves are confronted with accepting or rejecting an offer before they know what other offers might become available. 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. In that situation, nobody has enough information to make an optimal decision.

the timing of transactions depends not just on what is available now, but what is likely to be available later.

Before participants can enjoy the benefits of a thick market, a marketplace has to overcome the congestion that thick markets bring with them—that is, the problem of how to allow multiple offers to be made and considered in the time available.

Markets that involve offers and responses require easy two-way communication. This is why the rise of mobile communications has been so important for the development of many Internet markets: smartphones shorten response times.

In all of these new markets, the entrepreneurs building them have had to figure out how to make the market thick by attracting lots of buyers and sellers; how to overcome the potential congestion that could result—that is, how to make the market quick even when it was thick; and how to make the market safe and trustworthy

Commodity markets usually have somewhat less trouble with congestion, since the offer to buy or sell shares of stock or bushels of wheat can be made to the whole market, and the buyer or seller can change a bid or an ask at any time, without having to wait for anyone else. But in matching markets, some offers have to wait for the decisions of others.

Their longevity would provide at least some testament to their honesty and reliability.

When everyone is in the same place, good reputations can be earned naturally by honest businesspeople. But (to paraphrase a famous cartoon) on the Internet no one knows you’re a reputable businessman. As a customer, it’s a whole lot harder to assess the reputation of someone whom you know only by a username and whose other customers you’ve likely never met.

Both safety and reliability fit under the general heading of making a market trustworthy.

market designs for trustworthiness have focused on providing secure methods to make payments, providing insurance for transactions that go bad, and building feedback systems that allow reliable sellers, and sometimes buyers, to develop and display good reputations.

And as entire markets move to the Internet, this overload of messages can make markets congested.

Applicants need to signal their qualifications and interest even for jobs that require very specialized education and long training, despite the fact that such preparation is itself a strong signal.

When other signals may be cheap talk, these signals indicate that you are interested enough to use scarce resources that you can’t just send to everyone. So a scarce signal isn’t cheap talk; it comes with an opportunity cost—you could have sent that signal to someone else instead.

it’s safe to bid your true value in a second-price auction of this kind, since you can’t do better by bidding anything else. Notice that while a second-price auction makes it safe for bidders to bid the true value to them, it doesn’t necessarily impose a cost on the seller, even though the seller receives only the amount of the second-highest bid. That’s because in a first-price sealed bid auction, for example, it isn’t safe for bidders to bid their true value; they have to bid less than that if they are going to make any profit, since if they win the auction, they will have to pay the full amount of their bid. So the seller in a first-price auction receives the amount of the highest bid, which is, however, less than the true value of the highest bidder.

first-price auctions, in which the winning bidder pays what she bids, have their own charms and exist in many varieties. One version of a first-price auction is used to sell cut flowers in bulk, in a “descending bid” auction. The auctioneer sets up a “clock” that has the current bid on it, starting with a very high bid and quickly descending, until some bidder stops the clock by offering the price it currently shows,

Debates about what can be bought and sold for money touch on some of the most fundamental issues of democracy.