Market Design

Market design is a sub-fields within theoretical Economics. The “state of the art” lies with a group of academics associated with Market Design Inc . Studies focusing on market behaviour analyze how given a set of stable institutions, traders respond to the incentives incorporated in the market rules, decide on optimal strategies and thereby determine clearing prices and quantities. Market design deals with the inverse problem of calculating a set of optimal market rules given that bidders behave in an incentive compatible and individually rational manner. See Krishna, V. (2002), Milgrom, P. (2004) for textbook introductions to the field.

Even though the tractability and the rationality restrictions of the mechanism design approach have been criticized (Marks, R. (2005)), it has not been seriously challenged. To the contrary, mechanism design methodology has been successfully implemented in practice in the creation of markets for pollution emissions, electricity and electro-magnetic spectrum. Mechanism design has a lot to contribute to the design of technology-based marketplaces. It is up to the task of providing optimal rules for the dynamic pricing and clearing of well studied markets for perishable agricultural commodities such as fish and flowers (Brendstrup, B. and H. Paarsch (2004), van den Berg, G., J. van Ours and M. Pradhan (2001)). The current theoretical literature is also well poised to address issues of collusion and cooperation such as the formation of bidding rings and bidding coalitions (McMillan, J. and R. P. McAfee (1992)). Despite the appeal of its rigor and the generalisability of its results, the top-down approach faces the challenge of applying theoretically-derived optimal designs in practice. Notably, top-down design has been most successful in government sponsored applications where incumbent markets have not existed and all the interested participants have had to subscribe to the newly engineered market (e.g. carbon emissions, magnetic spectrum) and not so successful in introducing alternatives to traditional decentralized marketplaces.

This current state of the art in academia poses significant questions with regards to design when it comes down to the use of technology for the facilitation of trade in already existing markets in developing countries. The design problem is twofold. One is the extension of the market design problem to the use of mobile (or otherwise) technology. The other problem concerns the introduction and adoption of a new market mechanism within an already established market.

References:

BRENDSTRUP, B., and H. PAARSCH (2004): “Nonparametric Identification and Estimation of Multi-Unit, Sequential, Oral, Ascending-Price Auctions with Asymmetric Bidders,” Fondazione Eni Enrico Mattei.

KRISHNA, V. (2002): Auction Theory. San Diego: Academic Press.

MARKS, R. (2005): “Market Design,” in Handbook of Computational Economics: Agent-Based Modeling, ed. by K. Judd, and L. Tesfatsion: North-Holland.

MCMILLAN, J., and R. P. MCAFEE (1992): “Bidding Rings,” American Economic Review, 82 579- 599.

MILGROM, P. (2004): Putting Auction Theory to Work. Cambridge: Cambridge University Press.

VAN DEN BERG, G., J. VAN OURS, and M. PRADHAN (2001): “The Declining Price Anomaly in Dutch Dutch Rose Auctions ” American Economic Review, 91, 1055-1062.

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Mobile Market Design for Development

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