French market design in practice: Some lessons from the 2022 energy crisis

We review past research and discuss future directions on how the vibrant research areas of market design and behavioral economics have influenced and will continue to impact the science and practice of management in both the private and public sectors. Using examples from various auction markets, reputation and feedback systems in online markets, matching markets in education, and labor markets, we demonstrate that combining market design theory, behavioral insights, and experimental methods can lead to fruitful implementation of superior market designs in practice. This paper was accepted by David Simchi-Levi, Special Section of Management Science: 65th Anniversary.

In recent years, many developments have been made in matching theory and its applications to market design. This paper surveys some selected topics from this research area and describe our own work. We also describe the newly established University of Tokyo Market Design Center (UTMD), which works as a vehicle for practical implementation.

Reprint of “French market design in practice: Some lessons from the 2022 energy crisis”

A well-designed and well-integrated carbon market can reduce emissions reduction costs for the industry and help India meet its climate goals along with its economic aspirations. This report provides practical design and implementation recommendations for an effective carbon market in India, bringing together learnings from international carbon markets, India’s experience with market-based mechanisms over the two decades, and insights and industry feedback from a carbon market simulation.

Cash-settled options for wholesale electricity markets

We interview each other about how game theory and mechanism design evolved into practical market design. When we learned game theory, games were modeled either in terms of the strategies available to the players (“noncooperative games”) or the outcomes attainable by coalitions (“cooperative games”), and these were viewed as models for different kinds of games. The model itself was viewed as a mathematical object that could be examined in its entirety. Market design, however, has come to view these models as complementary approaches for examining different ways marketplaces operate within their economic environment. Because that environment can be complex, there will be unobservable aspects of the game. Mathematical models themselves play a less heroic, stand-alone role in market design than in the theoretical mechanism design literature. Other kinds of investigation, communication, and persuasion are important in crafting a workable design and helping it to be adopted, implemented, maintained, and adapted.

In the last decade, numerous student assignment systems have been redesigned using input from economists in the large American cities and elsewhere. This article reviews some of these case studies and uses practical experiences to take stock on what has really mattered in school choice mechanism design so far. While some algorithm design details are important, many are less practically important than initially thought. What really matters are basic issues that market operators in other contexts would likely be concerned about: straightforward incentives, transparency, avoiding inefficiency through coordination and well-functioning aftermarkets, and influencing inputs to the design, such as applicant decision-making and the quality of schools. INTRODUCTION In recent years, there has been a great deal of research activity and excitement among economists who study the design of systems used to assign students to schools. Motivated by Turkish college admissions, Balinski and Sonmez (1999) first defined the student placement problem, and Abdulkadiroglu and Sonmez (2003) defined the closely related school choice problem, motivated by K-12 public school admissions in the United States. Both articles showed how insights from matching theory could be used to re-engineer and potentially improve existing centralized school assignment systems. Abdulkadiroglu and Sonmez (2003) proposed two alternativemechanisms, which are adaptations of widely studied mechanisms in the literature on matching and assignment markets, following seminal contributions by Gale and Shapley (1962) and Shapley and Scarf (1974). Since that article was published, I have been involved in a number of efforts to redesign school choice systems, including those in New York City (2003), Boston (2005), New Orleans (2012), Denver (2012), Washington DC (2013), and Newark (2014). New systems have also been developed in England, Amsterdam, a number of Asian cities, and elsewhere. The purpose of this article is to review some facts from the field about these redesign efforts and to take stock on what I think has been important in practice so far. This article is not a survey of research on school choice market design (for surveys see, e.g., Pathak, 2011 and Abdulkadiroglu and Sonmez, 2013). My inspiration comes from Klemperer (2002), who presents his views on what matters for practical auction design based on his experience in designing auctions and advising bidders. Klemperer concludes that “in short, good auction design is mostly good elementary economics,” whereas “most of the extensive auction literature is of second-order importance for practical auction design.”

Objective measures of design typicality

The Swedish Royal Academy awarded the 2012 Nobel Prize in Economics to Lloyd Shapley and Alvin Roth, for the theory of stable allocations and the practice of market design. These two American researchers worked independently from each other, combining basic theory and empirical investigations. Through their experiments and practical design they generated a flourishing field of research and improved the performance of many markets. Shapley provided the fundamental theoretical contribution to this field of research, whereas Roth, a professor at the Harvard University in Boston, developed and upgraded these theoretical investigations by applying them to the American market of medical doctors. Namely, their research helps explain the market processes at work, for instance, when doctors are assigned to hospitals, students to schools and human organs for transplant to recipients.

The adequacy problem in electricity market is becoming a very important issue as there is neither theoretical proof nor practical evidence of correct delivering of sufficient and timely generation capacity when it is needed in a real (imperfect) environment. In contrast, classical market design seems to fail when facing high demand growth and/or large hydro share as seen in several Latin American countries such as Chile, Brazil, Colombia and Peru among others. Currently, various mechanisms have arisen across this region with the intention of stimulating energy procurement and new investment. These are mainly based on long-term contract and options obligations, which are allocated through auctions. Auction theory then becomes very important to ensure optimal allocation and efficient prices for both the new generation and the end user. However, difficulties arise when applying pure auction theory because basic hypotheses are not met by most electricity markets. The objective of this paper is to address and discuss the Latin American experience with auction design for long-term contracts focusing on practical design and theory. The different mechanisms and auctions for ensuring supply adequacy are listed along with theoretical justification as part of the potential solution for the adequacy problem that different economies have proposed.

Background Older adults’ acceptability of smart homes that learn their motion patterns and can take an action on their behalf has received little attention. This interdisciplinary study explored the influence of culture on older adults’ adoption of smart home monitoring. Method In-depth email interviews were used with a purposive sample of US older adults (n=21) age 65 and older. Participants were asked to prospectively consider the question of adoption of a smart home that combines artificial intelligence software with sensor monitoring for the purpose of maintaining safety and health of the community-dwelling older adult. Content analysis, consistent with the qualitative descriptive methodology, was used to organize data into low-inference themes. Themes were iteratively evaluated and consensus among the research team was achieved. Results and discussion Themes that emerged from rich text and were supported with participants’ own words were privacy, pride and dignity, family, trust, being watched, human touch, features and functionality, cost, and timing. Participants were asked to self-identify their own culture of socially constructed values, which were found to heavily inform perceptions of privacy, independence, and family. Many participants indicated a prospective openness to smart home interventions, including monitoring. Openness depended on (i) the level and specificity of need and whether the smart home would meet that need, (ii) perceived loss of privacy compensated by a feeling of safety and a receipt of health-assistance, (iii) functionality, and (iv) cost. Findings from this study explicate and illuminate older adults’ perceptions and descriptions of smart home monitoring, the relation to their own socially constructed values, and the influence on a decision to adopt or not adopt smart home monitoring. Findings may be used to inform the design of future smart homes, marketing, clinical practice and education, health policy, interdisciplinary collaboration, and research.

Regret, Learning and Risk Aversion in First Price Sealed Bid Auctions

Access to the radio spectrum is vital for modern digital communication. It is an essential component for smartphone capabilities, the Cloud, the Internet of Things, autonomous vehicles, and multiple other new technologies. Governments use spectrum auctions to decide which companies should use what parts of the radio spectrum. Successful auctions can fuel rapid innovation in products and services, unlock substantial economic benefits, build comparative advantage across all regions, and create billions of dollars of government revenues. Poor auction strategies can leave bandwidth unsold and delay innovation, sell national assets to firms too cheaply, or create uncompetitive markets with high mobile prices and patchy coverage that stifles economic growth. Corporate bidders regularly complain that auctions raise their costs, while government critics argue that insufficient revenues are raised. The cross-national record shows many examples of both highly successful auctions and miserable failures. Drawing on experience from the UK and other countries, senior regulator Geoffrey Myers explains how to optimise the regulatory design of auctions, from initial planning to final implementation. Spectrum Auctions offers unrivalled expertise for regulators and economists engaged in practical auction design or company executives planning bidding strategies. For applied economists, teachers, and advanced students this book provides unrivalled insights in market design and public management. Providing clear analytical frameworks, case studies of auctions, and stage-by-stage advice, it is essential reading for anyone interested in designing public-interested and successful spectrum auctions.

Market design mechanisms are often required to be strategy proof, ensuring that no misreporting is profitable. This, however, may be overly restrictive: Real-world participants may be unable to engage in complex misreporting. In the context of school choice, this paper proposes that mechanisms ought to be immune only to certain “simple” misreports. While no strategy-proof mechanism Pareto improves on the deferred acceptance (DA) mechanism, we find one under our weaker requirement: Kesten's (2010) efficiency adjusted DA (EADA). By extending our criterion to also prevent simple “collective” misreports, we obtain characterizations of Kesten's mechanism. These insights contribute to practical market design. (JEL C78, D47, D82, I21)

The 2020 Economics Nobel Prize was awarded to Paul Milgrom and Robert Wilson. Both laureates have made seminal, crucial contributions to auction theory and practical market design. Here, we briefly describe those contributions and their significance within the general context of auction theory and practice. We also review the laureates’ substantial and highly influential work in other areas of economics.