Market design

Market design papers (without abstracts)

“Market Design in Energy and Communications,” Working Paper, University of Maryland, April 2015. [Presentation]

“Market Design: Harnessing Market Methods to Improve Resource Allocation,” White Paper, University of Maryland, October 2010.

“Innovation and Market Design.” In Josh Lerner and Scott Stern (eds.), Innovation Policy and the Economy, Volume 9, National Bureau of Economic Research, 113-137, Chicago: University of Chicago Press, 2009.

“Market Design: Auctions and Matching.” In John Siegfried (ed.), Better Living Through Economics, Harvard University Press, 223-225, 2010.

“Cartel Enforcement with Uncertainty About Costs,” (with Thomas R. Palfrey) International Economic Review, 31, 17–47, 1990. Reprinted in Stephen W. Salant and Margaret C. Levenstein (eds.), Cartels, Volume 1, Cheltenham, UK: Edward Elgar, 2005.

“Ratifiable Mechanisms: Learning from Disagreement,” (with Thomas R. Palfrey) Games and Economic Behavior, 10, 255–283, 1995.

Dissolving a Partnership Efficiently,” (with Robert Gibbons and Paul Klemperer) Econometrica, 55, 615–632, 1987. Reprinted in Paul Klemperer (ed.), The Economic Theory of Auctions, Volume 2, Cheltenham, UK: Edward Elgar, 2000.


Market design papers (with abstracts)

“Market Design in Energy and Communications,” Working Paper, University of Maryland, April 2015. [Presentation]

I discuss market design issues in two important regulated industries—energy and communications. In both industries auction markets have transformed monopoly utilities into competitive markets. Restructured electricity markets are based on a portfolio of markets that allow contracting to take place in the short-, medium-, and long-term. Many challenges, especially with long-term markets, have been solved only recently. In communications, spectrum auctions largely have succeeded in efficiently pricing and assigning the scarce spectrum resource among competing carriers. However, going forward, it will be important for governments to encourage the development of short- and medium-term markets for spectrum. This is the best way for regulators to support innovation and competition in wireless services. Good market design does not just happen. It requires the engagement of experts and regulators focused on social welfare maximization who resist capture by special interests.

“Market Design: Harnessing Market Methods to Improve Resource Allocation,” White Paper, University of Maryland, October 2010.

The emerging field of market design applies auctions and matching to solve resource allocation problems. This paper focuses on auction design, the branch of market design where money is used to facilitate the exchange of goods and services. Within auctions, the paper examines applications involving government regulated resources. Who should use the scarce radio spectrum and at what prices? How should electricity markets be organized? How should financial markets be regulated? And how should runway access be assigned at congested airports? All of these are important questions in major industries. Researchers in market design have made substantial progress in answering these questions over the last fifteen years. The efforts, although at the forefront of theory have been closely tied to practice, and involved interdisciplinary teams of economists, computer scientists, and engineers, all working to solve real problems. Despite this rapid progress, the field holds much promise to provide better answers in even more complex economic environments over the next two decades. The rewards to society from improved markets will be immense.

“Innovation and Market Design.” In Josh Lerner and Scott Stern (eds.), Innovation Policy and the Economy, Volume 9, National Bureau of Economic Research, 113-137, Chicago: University of Chicago Press, 2009.

Market design plays an essential role in promoting innovation. I examine emission allowance auctions, airport slot auctions, spectrum auctions, and electricity markets, and demonstrate how the market design can encourage innovation. Improved pricing information is one source of innovation. Enhancing competition is another driver of innovation seen in all of the applications. Market design fosters innovation in other ways as well by addressing other potential market failures.

“Market Design: Auctions and Matching.” In John Siegfried (ed.), Better Living Through Economics, Harvard University Press, 223-225, 2010.

“Cartel Enforcement with Uncertainty About Costs,” (with Thomas R. Palfrey) International Economic Review, 31, 17–47, 1990. Reprinted in Stephen W. Salant and Margaret C. Levenstein (eds.), Cartels, Volume 1, Cheltenham, UK: Edward Elgar, 2005.

What cartel agreements are possible when firms have private information about production costs? For private cost uncertainty we characterize the set of cartel agreements that can be supported, recognizing incentive and participation constraints. If defection results in either Cournot or Bertrand competition, the incentive problem in large cartels is severe enough to prevent the cartel from achieving the monopoly outcome. However, if the cartel agreement requires less than unanimous ratification by the member firms, then the incentive problem can be overcome in large cartels. With common cost uncertainty, perfect collusion is possible in large cartels, regardless of the ratification rule.

“Ratifiable Mechanisms: Learning from Disagreement,” (with Thomas R. Palfrey) Games and Economic Behavior, 10, 255–283, 1995.

In a mechanism design problem, participation constraints require that all types prefer the proposed mechanism to some status quo. If equilibrium play in the status quo mechanism depends on the players’ beliefs, then the inference drawn if someone objects to the proposed mechanism may alter the participation constraints. We investigate this issue by modeling the mechanism design problem as a two-stage process, consisting of a ratification stage followed by the actual play of the chosen game. We develop and illustrate a new concept, ratifiability, that takes account of inferences from a veto in a consistent way.

Dissolving a Partnership Efficiently,” (with Robert Gibbons and Paul Klemperer) Econometrica, 55, 615–632, 1987. Reprinted in Paul Klemperer (ed.), The Economic Theory of Auctions, Volume 2, Cheltenham, UK: Edward Elgar, 2000.

Several partners jointly own an asset that may be traded among them. Each partner has a valuation for the asset; the valuations are known privately and drawn independently from a common probability distribution. We characterize the set of all incentive-compatible and interim-individually-rational trading mechanisms, and give a simple necessary and sufficient condition for such mechanisms to dissolve the partnership ex post efficiently. A bidding game is constructed that achieves such dissolution whenever it is possible. Despite incomplete information about the valuation of the asset, a partnership can be dissolved ex post efficiently provided no single partner owns too large a share; this contrasts with Myerson and Satterthwaite’s result that ex post efficiency cannot be achieved when the asset is owned by a single party.