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20150911 Who gets What

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MAIN IDEA:

The main idea of this book is that markets are not necessarily intrinsically effective when they are created spontaneously and quite often they fail in fulfilling their function of supporting efficient exchange of good and services, especially in a case of matching markets when subjects of exchange have unique parameters that should match for exchange to occur. Consequently in such cases of complex matching markets the conscious design of market place and its processes is required. It leads to main point of this book that the new and very important area of applied economics should be developed for markets design and implementation.

DETAILS:

MARKETS ARE EVERYWHERE: Introduction: Every Market Tells a Story

This is review of markets as the places of exchange real or virtual with stress on difference between commodities market and matching markets. Very important point is that markets effectiveness and efficiency highly dependent on market design that often done informally without clear understanding what needs to be achieved and how. Author stresses 2 parameters of the market: thickness and congestion. Well-designed market should be thick and uncongested.

Markets for Breakfast and Through the Day.

This is discussion of commodities market and history of their development. Author using history of grain and coffee markets to demonstrate that it typically starts as matching market when every farmer sells specific batch of grain that overtime develops into commodity market when batches are mixed and grain sorted by some relevant parameters into trenches of consistent grades, making it a lot easier to trade. Author also discusses how contemporary communication technology such as Internet and mobile devices made very thick market for just about everything conceivable.

Lifesaving Exchanges

This chapter is about a very specific market that author helped to design: non-monetary market of kidney exchange. The problem was that it is highly complex matching marked severely impeded by government ban on organ sales. As result kidney provided exclusively on voluntary basis, typically by people who want to save their relatives. The problem of medical compatibility between donors and recipients makes this process highly complicated. Author describes in details challenges and solutions that allowed developing sophisticated multistep and multilayer market place effectively supporting kidney exchanges.

THWARTED DESIRES: HOW MARKETPLACES FAIL: Too Soon

Part two is dedicated to market failures and their typical causes. In this chapter author uses history of Oklahoma land rush and its sooners to look at market failure caused by timing issues when market participants arrive at different times causing exchanges to occur too soon, consequently being by far less efficient than if all participants were present at the same time. Another interesting example of too soon exchange is marriage market for women that dramatically changed from 1950s to our time. Similar issues are demonstrated for doctors versus residents matching exchanges. Author also demonstrates how cultural preferences specific for doctors’ specialty lead to different outcome for similar market design that worked fine for one specialty, but not for another.

Too Fast: The Greed for Speed

This is about market failure caused by being to fast. This is discussed using NYSE and CME exchanges when at one point it was possible to make money by cutting millisecond from speed of exchange. Another interesting example discussed is matching market for court judges and students when students are looking for the most prestigious judge to clerk for, while judges look for the best students. Interesting detail is exploding clerkship offers, which are issued with expiration time that sometime counted in minutes.

Congestion: Why Thicker Needs to Be Quicker

This chapter is about search for goldilocks point when market designed to be not too fast and not too slow. It reviewed using example of Airbnb, which brings to the market underutilized living space and StubNub, which brought to the market old staff from the attics and basements. However most interesting is review of New York school placement matching market and how similar markets should handle congestion.

Too Risky: Trust, Safety, and Simplicity

This chapter is about key characteristics of the market without which it has hard time to stay open, especially trust and safety. It goes through discussion of value of good name and necessity to maintain information flow within effective parameters because too little information would prevent transactions from happening and too much would limit privacy, consequently creating safety issues. It also reviews Boston School assignment market that works differently from New York.

DESIGN INVENTIONS TO MAKE MARKETS SMARTER, THICKER, AND FASTER The Match: Strong Medicine for New Doctors

This is review of algorithms used to create market for new doctors assignments, which mathematically proved to produce optimum solution for individuals. However when encountering real live complexity such as assignment of couples, it requires quite a bit of tinkering and can deliver only good enough, but not necessarily optimal results. There is also an interesting discussion about centralized marketplaces versus central planning. As result the Rural Hospital Theorem was developed proving that it is not possible achieve stable outcome by changing market rules to achieve predetermine result if people do not want it.

Back to School

This is another recap of school assignment market functioning in New York and Boston with inevitable conclusion that no market design could compensate for insufficient supply of good schools.

Signaling

This chapter is about very important part of any matching market: Signaling. The signals or, in other words, broadcasting information about possibility of match and most important probability that effort invested into exploring such match should not be wasted. Author reviews signaling in such important market as college admissions, job search, and love and marriage. Quite a bit of space assigned to analysis of auctions as signaling systems for matching markets.

FORBIDDEN MARKETS AND FREE MARKETS: Repugnant, Forbidden… and Desired

This chapter looks at legality and morality of some transactions that majority finds repugnant. An interesting point is made that sometimes transactions are considered to be fine as long as they are conducted in non-monetary form, but become repugnant when money added. Obviously kidney exchange is one of such transactions and author reviews implication of this attitude.

Free Markets and Market Design

This chapter is kind of summary of the book with inference that free markets are the best we have, but not perfect and therefore prone to failure from time to time. However it should not be the reason to switch from market to central planning, which is consistently inferior to the market. It rather reason to consciously design market to meet requirements of its participants in effectiveness and efficiency of exchange process. Author sees role of economists as market design engineers because market is not some natural phenomenon, but rather human artifact most often developed spontaneously. The conscious design quite possibly could provide for significant improvement in market design.

MY TAKE ON IT:

As far as I am concern it is the great book filled with very good ideas and interesting examples of implementation of these ideas in real live. I think that development of market engineering for complex matching market has great future as practical area of application for economic and psychological knowledge currently being developed on the large scale. I’d like to see multitude of well-designed markets substituting cumbersome bureaucratic mechanisms of big government and big corporations, eventually pushing out of our lives these monstrosities.


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