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It’s A Match!: The Importance of Matching in Markets

by Rhea Bisaria

There is no theory or economics behind love. Or, so we believe. Alvin Roth, a professor at Stanford University and co-recipient of the 2012 Nobel Prize in Economics, might say otherwise.

Commonly, markets work on the basis of demand and supply laws, allocating goods and services such that the individuals’ ability to pay and their willingness for the same matches. However, not all markets are that simple.

The system that runs the ride-sharing company Uber doesn’t just connect passengers and drivers based on price; it also has to connect the two based on where they are located. It operates in what is known as a matching market. “A matching market is a market in which the prices don’t do all the work,” Roth says. “ These are markets in which you can’t just choose what you wish for,  despite being able to afford it – you also have to be chosen.” Uber is a matching market between travellers and drivers.

As one starts paying close attention to marketplaces, a point that emerges is that not all marketplaces operate to merely find a price at which supply equals demand. Those are mainly the commodity markets. Matching markets are the hidden economic rule behind matchmaking sites like Tinder, and countless more. Matching theory governs everything, from marriages to kidney donations, from corporate hiring decisions to college admissions and even public housing. However, the laws these markets obey are seemingly more complex than the simple equilibrium of supply and demand with prices.

Labour markets are an example of matching markets too. You can’t just show up for work at Google – you have to be hired. Similarly, Google can’t just decide you’ll work for them – they have to make you an offer. Airbnb is a matching market between travellers and hosts. In both of these markets, prices play an important role, but not the only one.

Roth got the Nobel prize, partly, for helping to fix a long-standing problem with the market for kidney donations. Often, family and friends were willing donors for someone who required a kidney but their organs often proved to be incompatible. Roth thus devised an algorithm, called ‘deferred acceptance algorithm’ that would help match willing kidney donors to compatible patients with whom the donors had no connections otherwise. A kind of clearinghouse was thus established between recipients and donors to facilitate efficient exchanges. Roth’s previous works include restructuring the National Resident Matching Program, which matched medical-school graduates with hospital internships for efficient matches using this algorithm.

Let us try to understand this algorithm using the classic idea of matchmaking – dating. Suppose there are N men and N women such that each man has a strict preference regarding potential female partners and vice-versa. The goal is to match them into couples. A match is stable if every person in the model prefers his match, to being unmatched, and if there is no man or woman who prefers to be differently matched from their current partners, and hence might disrupt the matching. Deferred acceptance is basically imagining a scenario of speed dating –  each man approaches a woman he’s interested in and depending on the woman’s interest, he is accepted or rejected. If rejected, he then approaches his second preference and the process repeats itself until each man is matched with a woman.

Other applications include the market for college admission and jobs wherein interested candidates are interviewed before being accepted.

Matching markets have recently been experiencing booms, one reason for which growing could be technological advances. eBay would not be possible without the internet acting as a medium or clearinghouse to match buyers and sellers; it is hard to imagine Uber without a smartphone. Thus, matching markets need something to intervene, be it institutions or technology, to make exchanges succeed. For instance, technology has enabled faster flow information, which is crucial when trying to find a match.

Perchance an example that most of us can easily understand would be the selection process for the Editorial Board, another example of a matching market where an interested candidate has to undertake certain tasks before being selected. Thus, matching markets abound in every aspect of our lives.

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