Market design combines auction and matching theory with behavioral and experimental economics to design innovative markets to better meet goals. Applications are seen in almost all markets and government programs that assign and sometimes price scarce resources. Market design research leads to a better understanding of the incentives that guide behavior. Applications include matching students to schools, interns to hospitals, and kidneys to patients. In settings where prices are used to motivate behavior, auctions are developed to assign and price scarce resources. Applications include markets in mobile communications, electricity, financial securities, transportation, and emissions.
Market design takes as given that participants interact in the market to maximize their objectives given the market rules. The question we ask is, “Are the market rules best-suited to the market’s objectives, or can they be improved?” This is a hugely important and practical question. In nearly all cases, the answer is that the market rules can be improved and often the improvements can transform entire industries for the better.
The methodology of economics employs mathematical and logical tools to model and analyze markets, national economies, and other situations where people make choices. Understanding of many economic issues can be enhanced by careful application of the methodology, and this in turn requires an understanding of the various mathematical and logical techniques. The course reviews concepts and techniques usually covered in algebra, analytical geometry, and the first semester of calculus. It also introduces the components of subsequent calculus and linear algebra courses most relevant to economic analysis. The reasons why economists use mathematical concepts and techniques to model behavior and outcomes are emphasized throughout. The course will meet three times a week, twice for lectures and once in discussion section conducted by a teaching assistant. Lectures will expand on material covered in the text, stressing the reasons why economists use math and providing additional explanation of formal mathematical logic. Discussion sections will demonstrate solutions for problems, answer questions about material presented in the lectures or book, and focus on preparing students for exams. Students should be prepared to devote 3-4 hours per week outside class meetings, primarily working on problem sets as well as reading and reviewing the text, additional reading assignments, and class notes. Course Objectives: Each student should be able by the end of the semester to:
• Recognize and use the mathematical terminology and notation typically employed by economists
• Explain how specific mathematical functions can be used to provide formal methods of describing the linkages between key economic variables
• Employ the mathematical techniques covered in the course to solve economic problems and/or predict economic behavior
• Explain how mathematical concepts enable economists to analyze complicated problems and generate testable hypotheses
Wouldn’t life be simple if, in making decisions, we could ignore the interests and actions of others? Simple yes–but boring too. The fact remains that most real-world decisions are not made in isolation, but involve interaction with others. This course studies the competitive and cooperative behavior that results when several parties with conflicting interests must work together. We will learn how to use game theory to formally study situations of potential conflict: situations where the eventual outcome depends not just on your decision and chance, but the actions of others as well. Applications are drawn from economics, business, and political science. Typically there will be no clear cut “answers” to these problems (unlike most single-person decisions). Our analysis can only suggest what issues are important and provide guidelines for appropriate behavior in certain situations.
Economists increasingly are asked to design markets in restructured industries to promote desirable outcomes. This course studies the new field of market design. The ideas from game theory and microeconomics are applied to the design of effective market rules. Examples include electricity markets, spectrum auctions, environmental auctions, and auctions of takeoff and landing slots at congested airports. The emphasis is both on the design of high-stake auction markets and bidding behavior in these markets.
Economics 603 is the first half of the Economics Department’s two-semester core sequence in Microeconomics. This course is taken by all first-year Economics Ph.D. students, as well as by quite a few Ph.D. students in Agricultural & Resource Economics, the Smith School of Business, and other academic departments. The first half of the semester treats consumer theory and the theory of the firm. The second half of the semester is an introduction to game theory and its applications in economics.
Presents a formal treatment of game theory. We begin with extensive-form games. A game tree is defined, as well as information sets and pure, mixed and behavioral strategies. Existence of Nash equilibria is discussed. We then turn to the analysis of dynamic games, covering repeated games, finitely repeated games, the folk theorem for repeated games, subgame perfection, and punishment strategies. Next, games with incomplete information are studied, including direct revelation games, concepts of efficiency, and information transmission. Several refinements of Nash equilibria are defined, such as sequential equilibria, stable equilibria, and divine equilibria. The analysis of enduring relationships and reputations is covered. The course concludes with a discussion of two important applications of game theory: auctions and bargaining. The topics include sealed-bid auctions, open auctions, private valuation and common valuation models, the winner’s curse, auction design, bargaining with incomplete information, double auctions and oral double auctions.