by Alvin E. Roth
In “Who Gets What… And Why”, Nobel laureate and Economist Alvin E. Roth reveals the surprising rules that govern a variety of activities – both mundane and life-changing – in which money plays little or no role. Most of the study of economics deals with markets where the price of a good is the chief influence. But what about other kinds of “goods,” like a spot in the Yale freshman class, a position at Google, or even the right romantic partner? This is the territory of matching markets, where “sellers” and “buyers” must choose each other, and price isn’t the only factor determining who gets what. Those matching processes, and how we navigate them, determine many of the most important turning points in our lives.
Roth explains that successful marketplaces share three main qualities:
- Thickness, meaning that the market gathers enough participants to increase the chances that all can make deals they’re happy with. For the kidney exchange this means amassing a huge database of patients and donors. For local farmer’s markets it means restricting the hours that they’re open, so they can sell to a maximum number of customers in a fixed amount of time.
- The absence of congestion. Congestion is “the economic equivalent of a traffic jam, a curse of success.” So the transactions need to happen quickly. Think about Airbnb, essentially a giant decentralized hotel. It has become the hot market for travelers looking for a nice, cheap place to stay and hosts who want to rent out their rooms and apartments. The spread of smartphones made this market uncongested because it can operate at digital speed and response time is instant. Hosts can respond faster and update their bookings, and travelers can search more efficiently with fewer time-wasting false leads. The spread of smartphones was essential to the success of this market.
- Safety and reliability. The risk of fraud, theft, or physical violence will reduce thickness because it scares people away from the market. On the Internet, companies like Uber and Craigslist must figure out how to make it safe for people to transact with strangers – and how to convince customers of this safety. Participants on both sides of a transaction must be able to rely on each other and on the underlying technology.
To show how ubiquitous matching markets are, in Who Gets What… And Why, Roth takes us from college bowl games to the Internet’s entrepreneurial stars to an Aborigine tribe who arrange marriages for their unborn grandchildren. Indeed, markets are all around us from whom we marry to where we park. Roth also reveals how to square market design with the notion of the “free market” that so many hold dear. As he proves, a truly free market is not devoid of rules; instead it has rules that encourage people to participate with confidence. His lively, revelatory book shows us how to get what we want from the matching markets all round us.
Alvin Roth is one of the world’s leading experts on matching markets. He has designed several of them, including the system that increases the number of kidney transplants by better matching donors to patients, the exchange that places medical students in residencies and the New York City and Boston school choice systems. He is the McCaw Professor of Economics at Stanford University and is one of the world’s leading experts in the fields of market design and game theory and a corecipient of the 2012 Nobel Prize in economics.
Categories: Books for Brains