Guillaume Haeringer - Market design auctions and matching

This book is an introduction to market design. It aims at providing students a broad overview of questions related to the design and analysis of market mechanisms.

Why take a course on market design or, put differently, why take a course on market mechanisms? Students in economics or business learn a great deal about markets: Where do supply and demand come from? How do equilibrium prices change when the market structure or some parameters change? But few students are exposed to simple, basic questions like: How are prices calculated? Does the way a price is determined matter? Does the procedure for applying to a school or a college have an impact on which school or college I will attend? How do we proceed when monetary transactions are not permitted, such as for organ donations? If one believes that students should be exposed to such questions, which are fundamental to economics, this textbook is a first step in that direction.

This book was written with several objectives in mind:

• Make the material as accessible as possible. Auctions or matching models can easily become involved, requiring a level of mathematics that not all students have. Special effort has thus been made to minimize the formal descriptions of the models and, whenever some formalism is introduced, carefully explain the mathematics to make it understandable for the majority of students. Minimizing the mathematics required emphasizing the intuitions and engaging in sometimes lengthy explanations and detailed resolutions of examples. Also, many results are presented without a proof.
• Over the past three decades or so, there have been a growing number of situations where economists have been able to help policy makers or regulators design market institutions, most notably auctions and matching markets. There have been successes and failures, and much has been learned. Successes are helpful because they can show, among other things, that theoretical works are not for theorists only, that the models economists study can be helpful. Studying failures is also helpful, because they show students that economists are aware of the limits of their models and are willing to learn from real-life, concrete problems.

Too often, students complain that microeconomics is too abstract and disconnected from reality. Market design is a formidable opportunity for instructors to show how theory can help to solve existing problems, which in turn can generate new theoretical questions.

The book alternates, as much as possible, theory and real-life applications or case studies, putting aside, unfortunately, many theoretical results and empirical studies. Such a selection has been more severe for theoretical results. Priority has been given to those results that have an immediate, concrete application and/or are considered fundamental results but not too difficult to illustrate and explain. There are thus many interesting and well-known results that are not presented in this book.

Although the book puts a strong emphasis on the dialogue between theory and applications, some parts are purely theoretical.

Theory can be very helpful in that it gives some structure to our thinking. It allows for an in-depth analysis of the essence of a problem. Because auctions and matching theory can be seen as applications of mechanism design, a textbook without some presentation of mechanism design and game theory, even if succinct, would be incomplete. I tried to make the book accessible for students with very little knowledge of game theory and mechanism design, but readers will also find two chapters that offer a general review of elements of game theory and mechanism design that are related to the themes explored in the book (Appendices A and B). Although these two chapters depart a little bit from the philosophy of this book, they follow the tradition at work in it by presenting the basic material, giving as many explanations and illustrations as possible.