Every year, thousands of young Americans apply to enter universities. Some of them manage to get into the best, while many others cannot. And this system may seem like a big lottery, but a proper way to look at it is to think of a big market with severe failures.
When we talk about markets, we often think of items, be it a state-of-the-art cell phone, a modern computer or soap, sold at a certain price to anyone who is willing to pay and has money. But these are not the only types of markets.
Kidneys available for transplants are scarce so is airspace: Airplanes spend many dollars a minute on fuel, and only one plane can occupy an airspace at a time. Passenger time is also expensive. Who receives a given kidney, in which operating room and which flight path should be taken on a given day: these decisions require an allocation of scarce resources.
Hospitals, universities, and schools also operate by market forces and in those markets, money is not the main thing.
Economics represents an efficient allocation of scarce resources, and it seeks to make these resources less scarce.
Markets control everything from the coffee you buy to the schools your children attend.
In a classic commodity market, the price is the only factor that determines who buys what. The mechanism here is simple: you decide what you want, and if you can afford, you buy it.
Going back a little, the term "commodity" refers to goods that can be bought and sold in quantities, such as beans sacs for example. As each sack is essentially identical to all other sacks, the price is the key factor in deciding whether a customer will buy it or not.
Some products cannot be classified as commodities. For example, a MacBook laptop is not identical to any other computer on the market; so someone who chooses to buy a MacBook instead of a Dell doesn't make that decision based solely on price, especially when costs are comparable.
These so-called 'matching markets' are complex. In the more sophisticated types of markets, the buyer and the seller need to "choose" each other. In this case, the price of the products doesn't determine who buys what. The ability to accept a specific payment is a part, but it's not everything. After all, you cannot buy a job at Google, or a romantic relationship; in both cases, you are dealing with matching markets.
To make it clear, a market involves 'matching' whenever the price isn't the only determinant. In some cases, especially when you deal with scarce resources, money doesn't even enter into the equation (think of a kidney transplant for example). Resources scarcity can create problems for buyers and sellers in matching markets and in some cases, improper information can lead to bad matches.
Entering university can be very expensive, and not everyone can afford it. But this doesn't happen because of expensive tuition. In reality, expensive and selective universities try to keep tuition at a 'low' enough price for students to attend. These universities accept only a fraction of the students who apply. But they cannot simply choose their students: they also need to impress them by offering tours, good facilities, financial aid, and scholarships. This is because many students are accepted into more than one university. This is a relationship very similar to dating and marriage: the two sides want to impress one another.
Markets are like roads. Sometimes they get crowded, which can lead to accidents or interruptions.
Of course, the secret isn't to free the road (or the market) completely. To be successful, markets need to be "wide," that is, involving as many participants as possible.
However, too much breadth can create congestion - an excessive variety of options that confuses consumers. Markets decelerate when participants need to spend a lot of time evaluating a potential business.
Commodity markets can avoid this problem. If you want to buy 200 AT&T shares on the New York stock market, you don't have to send an order or capture the seller. At the same time, the seller doesn't need to present the item - the stock market brings sellers and buyers together, at a price level determined by supply and demand.
Meanwhile, every transaction in the matching market should be considered individually. Think about the job market, where each candidate is evaluated separately; you can see how market congestion can occur when there are too many applicants for few jobs.
Despite this, it is possible to overcome congestion by using new technologies to make the market faster, even when its wide. Smartphones and applications have accelerated markets that require fluidity and two-way communication to produce bids and responses.
Consider Uber, the transport application. In the past, only taxis could pick up passengers on the street, while limousine services required reservations in advance. This meant that taxis had a monopoly on the fast-moving market.
The proliferation of smartphones changed all this, releasing numerous limousines and private cars that previously stood still. Uber didn't invent the hardware or introduce fleets of new cars. The company simply developed software that helped make the transportation market faster and wider at the same time.
Most of us believe that markets are open and fair. Even so, some try to take advantage of the system, which can lead to unbalanced markets. In unbalanced markets, both buyers and sellers are deprived of the information they need to make the best decisions.
For example, in the United States, most new lawyers in large companies were hired as summer associates, about two years before they finished law school. Law students receive "lightning bids" from companies - take-or-drop offers available for a limited period of time.
Making that kind of pressure ends the competition for the best candidates among law firms as it can dilute the number of good future lawyers on the market. Also, participants find it difficult to resist early decision making; they realize that if they want to wait to make a decision, they will probably lose to people who don't want to wait. This is a flawed system for two reasons: First, offices make offers without having information about the candidate's performance in the last two years of college. Second, students are required to accept or reject offers without knowing that other offers may arise.
In the 1980s, the US National Association for Law Placement (NALP) attempted to solve this problem by instituting a rule that barred first-year law students from accepting offers until they had completed the first semester. But, of course, since lawyers specialize in knowing the rules and finding loopholes, the offices quickly found ways to circumvent this rule; As a result, beginning lawyers still faced a troubled labor market.
New York public schools offer a case study on how design and innovation can dramatically improve problem markets.
In the past, the school system was very congested and inefficient. For starters, participants only exchanged information via mail and because some schools only admitted candidates who placed these schools first, students were reluctant to reveal their true preferences. To make matters worse, some schools refused to give information, denying places to certain students to keep places vacant for their preferred candidates. Similarly, some parents have learned that begging directly to school principals, could secure a place for their children, circumventing the corrupt system.
These factors produced a parallel market ruled by chaos and congestion. Many students struggled to enter their preferred schools, and school curricula were determined at the last moment before the start of the school year.
In 2003, the Department of Education called for help. They developed a computerized compensation system. It was an electronic, centralized marketplace that used an algorithm to organize students in schools based on the interests of all participants, students, parents, and schools. This algorithm ensured that both students and schools were more likely to achieve their desired results if they were honest about their preferences and rankings. So if a student wasn't accepted at his/her first choice school, the chances of being accepted into the second choice wouldn't be accidental. Compared with the original system, in which certain schools only wanted to accept students who placed them as the first choice, this system was excellent.
We have seen how improving the flow of information can improve markets, but there is a problem: too much information creates new problems.
This is the paradox of market design: with the increase and the cheapness of the ease of communication, it also becomes less informative.
Notice the proliferation of electronic communication. On the one hand, it has brought useful applications such as Uber; but on the other, it has dramatically increased the volume of messages we receive, making it extremely difficult to distinguish between what is essential and what is irrelevant. This level of communication overload can create congestion within markets.
For example, in the past American students filled out individual forms for each university they wanted to attend. But currently, an online platform allows students to use a single system to apply to nearly 500 American universities.
While it is much easier for students to apply to more universities, it is much harder for universities to measure each student's level of interest.
However, you can limit this congestion by implementing signaling on the market.
In South Korea for example, admission exams to competing universities are often scheduled the same day, limiting the number of universities each student can try. Thus, taking a specific university exam helps the student to send a signal of interest to their university of choice.
The American university system offers a different set of signals. Some colleges ask students to sign guest books when participating in campus visits. Applicants also have the option of applying through an advance decision system - students apply at their preferred schools on the condition that, if accepted, they will need to enroll in those schools. Since this early decision system requires students to send a very strong signal of interest to the university, the admission rates for this type of student are much higher.
Let's now think of organ donors and the prices involved. There are many patients who need a new kidney, for example, there are indications of approximately 100,000 people on the waiting list, only in the United States; and there aren't as many donors. If the kidney market worked like commodity markets, kidneys could be priced. In this case, a person with lots of money would easily get a compatible donor. Also, someone with a very high purchase price would also attract potential buyers. However, the commodities market doesn't reflect the absurd idea or disgust involved in organ sales. The transaction of organs (sale or purchase) is illegal, which means that the kidney price as a commodity is zero - it should be a gift.
The hypothetical idea that who has money will also have power, is incorrect. As a society, we have different perceptions about money and about what money can do. Also, there exists the perception that having money can ensure good health. However, if we think of organ donors, for example, this hypothesis goes against the illegality of selling or buying an organ, which makes money insignificant.
Often you are caught in a dilemma: should you marry or should you end your relationship? When you have a larger market, when you are in college for example and live with many single people your age, your decision may be quite different from when the market is scarcer, and most people around you have married. But each marriage market is different from one another, and the timing of transactions depends on present and future availability. For example, women today decide to marry much later than before, and that turns the whole dynamics of that market since there are not as many new women available.
Making markets safe is one of the greatest difficulties of all time. Let's consider for example the Internet. The approaches to making online markets reliable and secure are constantly evolving. To date, the focus has been on providing secure payment methods, providing a guarantee for the wrong transactions, and building feedback systems for trusted buyers and sellers to develop a good reputation.
eBay was one of the first to solve these problems. Formerly few sellers had a good reputation, and they had to start from scratch. And the problem of trust affected not only sellers but buyers as well. These difficulties motivated the site to create eBay's feedback system, which was developed before online payment mechanisms such as Paypal. This feedback system allowed both buyers and sellers to give each other feedback, and these feedbacks became available for future transactions on the site. But over time, the ratings were too positive, which meant that they didn't have that much value anymore.
With help from economists, eBay developed a new feedback system, where buyers could give more detailed feedback to buyers, anonymously. This system put more value on feedback and information gained from them.
eBay's experience has revealed another principle of good markets: markets depend on reliable information. In the case of reputation, buyers wanted reliable information about sellers in the form of information about the experience of other buyers. But if buyers risk or are harmed by passing this information forward, they won't do so, and the whole market will be hurt.
When eBay feedback wasn't anonymous, an unsatisfied buyer who gave honest feedback could suffer retaliation. When eBay made it safer to disclose dissatisfaction, the information became more useful and detailed.
Our world is controlled by markets. Whether in the supermarket, in the hospital, at school, or anywhere else matching markets represent the different markets that do not involve the buying and selling of commodities.
Some markets are more complicated than simple financial transactions and involve different economic and human aspects. To learn to deal with each market specifically, you need to understand who the actors are and what is at stake for them. Using game theory, it is possible to analyze and chart the best strategies for each specific situation.
Thinking about the world as a market will help you understand what is most important and what can be reconsidered in each specific situation.
this book was cool right? We think you'll also enjoy Steven Levitt and Stephen Dubner's famous 'Freakonomics.' They explore everyday issues from an economic perspective.
Alvin Elliot Roth (nascido em 18 de dezembro de 1951) é uma personalidade acadêmico americano, ele é o professor Craig e Susan McCaw de economia na Universidade de Stanford e professor Gund de Economia e Administração emérito da Harvard University.Roth fez contribuições significativas para a campos da teoria dos jogos, design de mercado e economia experi... (Leia mais)
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