Widening the Markets

Roth, A. E. (2015). Who Gets What—and Why: The New Economics of Matchmaking and Market Design. Houghton Mifflin Harcourt. pp. 272, Rs. 253

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Nobel Prize-winning economist Alvin Roth’s book on markets opens with an aptly titled section called ‘Markets are Everywhere’ – a prelude to the kind of insight that the work has to offer. In a short but incisive summary of contemporary theory and applications of market-based economics, Roth provides glimpses of his seminal research on market design while leading up to contemporary studies on ‘matching markets.’ The book is bound together by a single, powerful example of market design, that is the market for organs in the context of the health care industry. This review attempts to summarize key messages that the book delivers, and place them in the Indian context.

First, it is important to understand the use of the word ‘market’ as implied in this book, and in general economic theory. Markets are taken to represent not just the exchange of goods and services, but broadly include any activity that requires two or more parties to engage with each other in an exchange. What is being exchanged is allowed to vary widely: researchers looking to ‘sell’ their ideas and techniques to grant agencies who are interested in ‘owning’ those ideas or techniques or even individuals seeking romantic relationships (willing to exchange their time, effort, and sometimes love). It is in this broader formulation of the market that Roth has based much of his work, particularly in the area of matching markets, where the price is not the sole determinant of whether or not a trade/exchange takes place.

Roth expands on this novel understanding of markets by laying out basic characteristics of market design, which he argues to be crucial to the efficiency of a market. The introductory chapter emphasizes that market design has much to do with the rules of the market – who can participate, how much can be purchased, how it can be purchased, among other crucial parameters that ultimately determine the organization of a market. An important characteristic for a market, as Roth points out, is how many participants are involved in the market, or thickness. Part I of the book makes extensive use of examples from medicine and health care to establish operational definitions of these terms. An important example used is that of the market for organs – where a patient with a disease requiring an organ transplant will often have to wait months and/or years to receive one that is not only biologically a good fit, but is also delivered on time. (For a more detailed account on the global market of human tissue, readers are redirected to The Red Market, by Scott Carney.)

The book is also able to appeal to important policy decisions when it comes to market failure (e.g., when a university does not get high quality faculty despite receiving several high quality applicants), without explicitly making value judgements on government intervention in markets. Despite being central to the book, Roth does not provide examples outside of the matching markets framework. This is perhaps on account of the richness of work on matching markets, and their applicability to any economic activity – from Airbnb to finding the right school for your child. The book is able to break down theorems on matching in market design to specific examples (Roth provides a decision-making algorithm for accepting children into schools). There are more traditional market examples such as financial trading (stock markets) and real estate, where the concepts laid out earlier are also applied.

India finds a few mentions in the book given that the market for organs is often illicit. An important characteristic to incorporate into the market design is then the level of formality with which transactions take place, i.e., the medium through which transactions are allowed. Take the case of organ trade – if individuals are allowed to transact over the internet or digitally (and not via cash, as is the case), then there may be greater scope to formalize the activity and link it with hospital administration to ensure greater efficiency. The book also suggests avenues for matching markets that have not yet been addressed. For example, in the market for restaurants, it is often difficult to judge whether or not a restaurant will have tables available for all your guests, especially when there are no prior plans for visiting such a restaurant. Indeed, in India and elsewhere, there are mobile applications as well as websites that now offer table-booking as a service for guests.

Finally, the book also suggests the importance of keeping markets ‘safe’: where only relevant information about participants is revealed or that no harm is caused to those who participate. The interaction between the supposedly cold, rational nature of markets is well contrasted with the social buy-in that’s often marked the success of matching markets (kidney exchanges included). In summary, the book provides a thorough overview of the emergence of market design in economics, as well as the potential for improving traditional problem areas in policy.

Anirudh Tagat