You can't always get what you want, especially in a market where prices don't play a role.
From dating, to school admissions to job placement, in a matching market, not only do you choose, you must also be chosen. Alvin Roth, co-recipient of the 2012 Nobel Prize in economics, tackles the quirks and irregularities of these markets in his new book Who Gets What and Why.
When examining markets, many economists look at supply and demand to determine efficient price points. While this system can work for commodities, it falls short when applied to matching markets, says Roth. An employer, for example, doesn’t simply lower wages until the number of openings equals the number of applicants, he explains. Price is simply one of many factors that determine who gets the job. For school admissions, a student’s willingness to pay tuition is only a small aspect of the acceptance process. The dating market, as well as the assignment of kidneys to dialysis patients, are other examples of matching systems where price isn’t the determinant.
Roth notes that all markets need to exhibit several key features to run efficiently and equitably: they need to be thick, quick, trustworthy and reliable. Amazon (AMZN), he adds, is an example of a well-run marketplace.
"Amazon presents a thick market, as there are lots of buyers and sellers who come together,” he says. “It may be hard to find the goods you want to buy, but Amazon has search engines to make it easier for you to find what's being offered…if you put a lot of different things in your shopping basket, they might each one be sold by someone else. But that's what it means to be a thick market, you can look at lots of potential transactions and choose among them."
Roth also highlights several market malfunctions and inefficiencies, citing the real estate market as an example.
"I continue to be surprised by the dominant role that realtors play in markets, even though it's now easier to get information on houses," he says.
When a home seller engages a broker, they are required to pay a fee, whether or not the buyer comes with a broker. "As a result the buyer has no incentive not to come with a broker,” he says. “I'm surprised that there haven't been more realtors, like Redfin, who say that they're willing to give discount services for discount prices."
Roth adds that he is a strong believer in markets, but all markets, even free-markets, must have rules. The design should "allow them to work freely, allow people to meet each other, and let them evaluate the transactions, and make it safe for them to participate," he says.