Market Design

3 Credits · Level: Graduate, Undergraduate

This course applies concepts from Microeconomics to the design of markets. It begins with a discussion of markets in which prices are not charged at all or the price charged does not clear the market (e.g., subsidized housing). The course then turns to matching (e.g., assigning students to public schools or university courses). The success of a matching market depends on several elements. The first is the thickness of the market. (Are there sufficiently many participants?) A second element is the safety of participation. (Is it safe for participants to reveal or act on their information?) A third is the market’s ability to overcome congestion. (Are participants able to consider enough alternatives that they can achieve a satisfactory outcome?) We will study assignment methods that have been successful in a range of cases where prices are not charged or the price charged does not clear the market. We next study auctions, which are market institutions with precise rules for determining who acquires the items and the prices charged. In the simplest case, an individual sells a single item. In other cases, there are several units of a good or several different goods for sale (e.g., a government sells the rights to offer wireless services or an online company sells advertising space). How should the goods be sold if the objective is to maximize revenue? Does the answer change if the objective is to maximize social surplus? Does it change if the buyers have different budgets? We will see that many familiar auction formats perform well, but the designs need to be tweaked in some cases. The course concludes with case studies of Market Design in action. Examples range from financial markets to food banks.