Journal Article | Harvard Business Review | October 2007

The Art of Designing Markets

by Alvin E. Roth

Abstract

Traditionally, markets have been viewed as simply the confluence of supply and demand. But to function properly, they must be able to attract a sufficient number of buyers and sellers, induce participants to make their preferences clear, and overcome congestion by providing both enough time to make choices and a speedy means of registering them. Solutions to these challenges are the province of market design—a blend of game theory and experimental economics. Roth, a professor of both business and economics at Harvard, is a leading market designer. He and his colleagues have rescued failing markets by, for example, designing labor clearinghouses through which U.S. doctors get their first jobs and auctions through which the Federal Communications Commission sells licenses for parts of the radio broadcast spectrum. They have also created market-like allocation procedures that involve neither prices nor an exchange of money; these include systems for assigning children to schools in Boston and New York and for facilitating exchanges of kidneys. Computers enable the design of "smart markets" that combine the inputs of users in complex ways: In kidney exchange, they run through every possible match of donors and recipients to arrange the greatest possible number of transplants. In the future, computers may make it possible to auction bundled goods, such as airport takeoff and landing slots. As online markets—like those for jobs and dating—proliferate, a growing understanding of markets in general will provide virtually limitless opportunities for market design.

Keywords: Market Design; Market Participation; Market Transactions; Information Technology; Online Technology;

Citation:

Roth, Alvin E. "The Art of Designing Markets." Harvard Business Review 85, no. 10 (October 2007): 118–126.