Economic Design

• Market Design is an area of economics where economists analyze and improve the way markets work.
• In economics, whenever there is a demand for something and a supply for that something, there is a market for that something, e.g., the market for milk.
• What is a market?

  whenever there is a demand for something and a supply for that something
• The equilibrium price (p) is when

  ♯ units buyers are willing to buy at p or more = ♯ units sellers are willing to sell for p or less
• A "thick" market is one where there are many buyers and sellers. This abundance of participants typically leads to better matches between supply and demand. For instance, in a labor market, a thick market would mean many employers and many job seekers.
• A commodity is a basic good used in commerce that is standardized such that it is interchangeable with other goods of the same type. Commonly traded commodities are oil, gold, or agricultural products like wheat and corn.
• What are examples commodities that is interchangeable with other goods of the same type?

  gold, oil, or agricultural products f.i. wheat or corn
• Price discovery is the process through which buyers and sellers interact in a market to determine the price of a good or service. It occurs in various types of markets, including stock markets, commodity markets, and consumer goods markets. Traders, investors, and consumers all contribute to price discovery by expressing their willingness to buy or sell at different prices.
• Preference revelation refers to the process by which individuals or entities reveal their preferences for goods or services, typically through their choices or willingness to pay. In markets, consumers reveal their preferences by choosing certain products over others and by how much they are willing to pay for these products.
• In certain cases price in not only variable of decision, but individuals also have preferences.
• What is necessary for a market to work?

  market thickness (aka enough actors from both sides)
• "Congestion" is what can happen when markets get too thick too fast: there are heaps of potential players, but not enough time for transactions to be made, accepted, or rejected effectively.
• A mechanism or system is said to be strategy-proof if no participant can benefit by misrepresenting their preferences or information, regardless of what the other participants do. In other words, the dominant strategy for each participant, which yields the best outcome for them, is to be truthful.
• Auctions are a common way to sell/buy goods when:

  ▪ Seller/buyer has little knowledge of what would be the “right” price.

  ▪ There is scarcity: fixed supply.

  ▪ The quality/ quantity of the good to be sold/ buy changes very frequently (electricity, fish, etc.).

  ▪ Transaction frequency is low.
• An auction is defined by:

  1. Bidding Format Rules: These dictate the form of the bids. Bids can be in various forms such as price only, multi-attribute, price and quantity, or quantity only.

  2. Bidding Process Rules: These include closing/timing rules, available information, and rules for bid improvements/counter-bids, along with closing conditions. 3. Price and Allocation Rules: These determine the final price(s) and quantities, as well as the winning bidders.