Trillion Dollar Economists

Chapter 7Matchmaker, Matchmaker

At a fundamental level, economics is about resource allocation, or who gets what? Mainstream introductory textbooks suggest that prices play a critical role in the answer. Those willing and able to pay the going price for goods and services sold in the market get what suppliers make available. In competitive markets, this outcome is said to be efficient.¹

However, there are many examples of markets where price is not the governing factor in decisions, if prices exist at all. Consider some of the most important decisions people make: where to go to college, which job to choose, or which person to marry. Price is important in two of these cases, but not in the third, and even in the first two, price is often or generally not the most important factor in the decision.²

So how do these nontraditional markets work, where matches may be made based on a certain set of rules and characteristics that are unique to each setting?³ Answering that question is the subject of this chapter, in which I introduce you to a new branch of economics called market design, a field devoted to making markets work more efficiently by better matching supply with demand.

I will begin with a brief and gentle introduction to the economics of matchmaking. I then discuss two major applications of market design and matching theory in the real world, including one where business is clearly at stake (the job market) and the other where the Internet has enabled much larger businesses ...