Summer School 6: When the markets need a designer

36m
In economics, a market is a place (even virtual) where buyers and sellers meet to exchange goods or services. Economists love markets. It's like all of our supply and demand graphs have come to life. Almost everything you buy goes through some sort of marketplace—your cup of coffee came from trading in the bean markets. Your spouse might have come from the dating marketplace on the apps. Even kids will tell you one Snickers is worth at least two Twix.

But sometimes, as we'll see today, markets can go terribly wrong; greed can run out of control; lives can be at risk. That's when the government often steps in and gives the market a little nudge to work better. Today's episode: Market Design.

The series is hosted by Robert Smith and produced by Eric Mennel. Our project manager is Devin Mellor. This episode was edited by Planet Money Executive Producer Alex Goldmark and fact-checked by Emily Crawford.

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Transcript

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This is Planet Money from NPR.

Welcome back, everyone, to Planet Money Summer School, Government Edition.

The only economics degree you can get at 1.7 times normal speed.

Very efficient.

Saves a ton of time.

Today we boldly go into the arena of competition known as the market.

In economics, a market is a place, even virtual, where buyers and sellers interact to exchange goods or services.

And economists love markets.

It's like all of our supply and demand graphs have come to life.

People buying, people selling, shouting out prices.

Wherever humans have congregated, markets have formed.

Thousands of years ago it was trading wheat and shells and copper.

Hundreds of years ago stock markets formed.

Everything you buy goes through some sort of marketplace.

Your cup of coffee came from trading in the bean markets.

Your spouse might have come from the dating marketplace on the apps.

Even kids will tell you one Snickers is worth at least two twicks.

It's a law of nature.

But sometimes, as we'll see today, markets can go terribly wrong.

Greed can run out of control.

Lives can be at risk.

That's when the government often steps in.

Gives the market a little nudge to work better.

This is class number six, market design.

This is such a cool and interesting area.

We wanted not just a professor to help us along, but a market designer.

The invisible hand made visible.

My name is Alex Tetelboim and I'm a professor of economics at the University of Oxford in England.

I bet in England you don't need to say the in England part.

Not every time.

So, Alex, as a market designer, you are often brought in to look at a particular market and see if it can be run more efficiently.

So, what are you looking for?

Well, you might say that all happy markets are alike, but all unhappy markets are unhappy in their own way.

Very literary of you, yes.

So, let's think a moment about making sure that a market works effectively.

Let's just say I'm in Istanbul and I go into their famous market there where they spot me immediately as a tourist and the negotiations begin.

What can go wrong in a market for an individual?

Well, in this particular market, what might happen is that you've got no idea what it is that you're buying.

One of the things that makes markets work badly is that some participants have the information about what's being traded and others don't.

So a really famous example that economists love is buying a secondhand car.

The guy who tries to buy the secondhand car has no idea really how good the car is.

And of course the seller does.

And economists like to point out that this can be a real problem because anybody you really end up trading with might be selling you a clunker.

There can also be collusion in a market.

As I wander in looking for the rug I want to bring back from Istanbul, all of the sellers could have agreed, hey, the moment you see a tourist, make sure you double the price.

Exactly right.

So, if these traders can get together and they can watch each other and can make sure that nobody's going to undercut, they can all agree to offer you a really high price.

So, we have these things that can go wrong in markets, and they get way more complex than the ones that I've brought up.

How can you design a market so bad things don't happen?

Well, we try to make sure that the things that make markets work well

work well.

So we often try to encourage competition.

We try to make sure that the participants are informed.

We try to figure out ways of preventing collusion.

We try to make sure that the participants actually get together at the same time.

That amazing bazaar you talk about in Istanbul, one of the things that makes it work really well is everyone is there at the same time under the same roof.

That makes a market work better than if the traders were scattered all over Istanbul and you would have to go around and look for one or the other.

So that's the kind of thing we try to do.

We try to get everyone under the same roof.

We've got to make sure that there's enough competition and we try to make sure that everyone is as well informed as anybody else.

Is it fair to say that a good market maximizes the number of people who are happy at the outcome?

Is happiness involved?

Market participants being happy is very important because in the end, most market participation is voluntary.

If a market doesn't work well, people can leave.

And markets that work well, they attract more people to come and join them.

So often the proof is in the pudding.

You can see a market working well when the participants are happy being in that market.

But of course, it wouldn't be an exciting episode of Planet Money if everyone was happy all the time.

Today, we will have two case studies of markets that are not working quite right.

One involves a secret flaw that allowed some smart people to make millions of dollars.

The other other case study is a market that quite literally killed some of its participants.

We will take you fishing after the break.

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But I hope you have your reinslicker with you because we are headed next to Alaska, specifically to the fishing fleet based in the town of Homer.

Working on a fishing boat in Alaska is one of the most dangerous things you can do for a living.

And today, we will see why.

Alex Tatelboim, what should our students be paying attention to in this story?

As you listen to this, just think about what rules are in place that are encouraging this very dangerous behavior by the fishermen.

This episode originally aired in 2015.

It was hosted by Jess Jang and me, and it told the story of how in Alaska, experts were worried about overfishing of halibut.

So they had a great idea.

Limit the number of days you can legally fish.

The windows for fishing got shorter and shorter until they would open fishing for only 24 hours.

They nicknamed it the derby because you competed to get as much fish as you possibly could in just 24 hours.

What kind of person would go out in a tiny little boat in miserable, dangerous weather to catch fish for 24 hours straight?

Everyone.

Just Jang told me that most everyone in Homer, Alaska wanted to do this.

You can pretty much grab anyone on the fish dock and they would tell you these crazy stories about the derby days.

Like I met Kirk Van Doren.

He goes by the name Carcass.

Carcass?

Yeah.

He kind of looks like a Carcass.

He's wiry, thin, with crazy hair, and he's a deckhand.

He works on other people's boats.

And Carcass told me the reason the derby got so dangerous was because the government chose what day it was months in advance, way beforehand.

They didn't know the weather when they chose the day.

And that meant the weather could be really bad and you would still go out.

Carcas remembers one really bad day.

Well, I was on watch and I'm just sitting up there thinking, man, it was a 1912 old wood boat, how nice the boat was taking these waves.

We're in like 45 to 50 footers.

And I mean, they're huge.

And this is a little 52-foot boat.

We got big curlers, you know, and we're going up and going and I'm going, oh, they're getting pretty nice.

Feeling pretty good.

Going up.

He's feeling so good because the fishing had been really, really great.

And that meant he was going to get a share of that catch.

And he thought he could get about $15,000.

He had even picked out what he was going to buy, a new truck.

So that's what he's thinking.

But the next wave came.

All of a sudden, we took one and we're not coming back up.

Rail buried, water's all over deck.

And I'm like, Mark, get up.

We're going down.

Carcass grabs the crate with the life raft and pops it open.

And a big wave came and

washed the life raft overboard, the brand new one.

The wind was blowing 100 miles per hour, and they decide to jump, swim for that lifeboat that was being swept away.

They hauled themselves inside.

Then we hear,

it's the Coast Guard airplane.

And I'll tell you, the most beautiful sound in the world is a C-130.

That's when you really think you're going to survive, you know?

Carcas and the three other guys, they all make it back.

They all survive.

They just don't have the fish anymore.

They don't have the money and Carcass was not getting a new truck.

But the crazy thing about Carcass is he goes back every year.

He's told me he sank five times.

Five ships have gone down under Carcass.

Five ships have gone down and he still goes back.

Man, the lesson is do not go out with Carcass.

I will never go out with Carcass.

I know that for sure.

You know, I've been to Alaska and you talk to these guys and the bravado really is stunning.

The ability to just keep going out and out and out again.

It amazes so many people, and even old-time fishermen like Clem Tillian.

He's 90 years old now, and he fished for decades.

He was looking at all these sinkings and just wondering why.

Young men loved the action, the excitement.

It was going like Las Vegas, you went roaring out into these storms and you caught all you could catch.

Clem was on the Fisheries Council at the time.

His job was to help protect the fish population.

And the 24-hour derby was, in fact, really good at protecting fish because the catch was limited by the number of minutes in a day.

No one was overfishing.

But he started to worry that the rules the government had set up were basically encouraging all these young men to take risks.

And there were real consequences.

For every thousand fishermen that went out, three didn't make it back.

It was a very stupid system.

It was murder by government, you might say.

Murder by government.

Yes.

And a few of us were looking at other ways of doing it.

There was an idea out there, a way to protect the fish and make fishing safer.

Instead of limiting the amount of time people fish, limit the total amount of fish that could be caught.

If you were a fisherman, instead of having to fish in these 24-hour sprints, this crazy race, Clem wanted a system where it would be basically leisurely.

Because each fisherman would be guaranteed a certain amount of fish at the beginning of the season.

It was this simple solution.

But anytime you distribute something valuable, you know people are going to fight over it.

Clem thought that the catch should be distributed among boat owners and captains.

And his thinking was those are the people who have invested a lot of money in boats and gear, and so they should reap the reward.

But when guys like Carcas heard about this plan, they got pissed.

Carcas didn't own a boat.

He was a deckhand.

He worked on someone else's boat.

hauling in the fish and risking his life.

And it was a real ridiculous thing that each one of us crew members shouldn't have got our share of it.

You know, it's like the owners knew what was going on.

The owners kept it to themselves.

You could see why they would be so upset.

Under the old 24-hour derby system, the fish went to the people who worked the hardest.

The fish went to the people who took the most chances, that sort of frontier mentality.

But now the government was coming in and saying, You are winners and you are losers.

The boat owners, clearly the winners.

The boat owners were going to be rich.

And the deckhands like Carcass, they weren't going to get anything.

They were being left out of the system.

They could fish and they could still work, but they weren't going to get a guaranteed share of the catch.

So you can understand why the losers, the deckhands, basically confronted the fishery council.

They confronted Clem Tillian.

There were mass demonstrations in some towns, and

my niece had her tires slashed, and my kids got beat up in the playground.

I mean, it was violent.

Your kids got beat up?

Yeah, because, you know, they were Tillian's kids, you know.

And that was just one of the things that happened.

When people don't like something, they can get pretty mad about it, especially when it's their livelihood.

And I was rearranging their whole livelihood.

Now, Clem and the Fisheries Council did look at other ways that could be considered more fair.

They looked at a lottery system where everyone gets an equal chance of getting the fish.

Or an auction.

where the permits went to the highest bidder.

But no one wanted to pay for something that they had always gotten for free.

And so with no better option, Clem drafted the proposal.

Here's what they were going to do.

Fish scientists would estimate how many halibut there were in the sea, how many could be safely caught.

Then the boat owners would each get a share of the fish.

No more race, no more derby.

It went into effect in 1995.

And when I visited Homer Harbor, you could see how different it was compared to those derby days.

When I wanted to go out fishing, I didn't have to wake up super early.

I didn't have to race.

I just called up a boat owner, and she said I could come anytime, no rush.

So this is the boat.

This is us.

I wouldn't bulge.

This is Christy and David Fry, and they tell me they have 1,700 pounds of halibut to fish.

That's our quota for the whole year.

And that's very specific, 1,700.

How'd they come up with that?

The government looked at how much fish the fries caught in those old derby days, and they took an average and used that to calculate their share.

Now, it's easier to enforce a time limit, 24 hours, than it is to enforce a very specific number, like 1,700 pounds of halibut.

How do they enforce it?

David says there would be these federal agents from NOAA and they would police the docks.

When they implemented this system, they just figured everybody was going to be a criminal, I guess.

So that brought the feds into it.

So that means there had to be guys with flat jackets on and guns and like, you know, come down to my boat, on my boat, with a damn gun.

and a flat jacket.

You're lucky you didn't go in the water, man.

And boy, it just pissed me off.

You're damn lucky I was afraid of them.

I know.

Alaskans are big into their freedom.

And I'm sure at first this fishing quota seemed like this

straitjacket on what they did on the whole freedom swashbuckling fishing vibe.

It did.

People were not into it at first.

But soon, fishermen saw the advantages.

If the weather was bad, they could just stay at home.

If you don't want to fish all season, you can take a break and lease out your quota.

You can have someone else fish it.

That sounds like a good sound.

When it starts, the fries drive the boat out of the harbor.

You don't see another commercial fishing boat for the whole day.

And that, by the way, is the whole point of the new system.

Now that people can trade or sell away their quotas, some boat owners have taken this easy money.

They've given their fish to someone else and have totally gotten out of the business.

The number of fishing boats is only a third of what it was before.

And the theory is, the only people left are the best and most efficient fishermen.

You beat that with a club.

No, they're like one big muscle and they're just trying to like get out of the boat.

Oh,

he's a fighter.

They're lively when it's shallow water.

It's gigantic.

Christy puts a knife through the gills and then quickly removes the guts.

She says in the past during the derby days, she didn't have time to take care of the fish like this.

She just threw all the fish on ice and hoped everything stayed fresh.

So it's better to gut it on the boat.

It is so much better.

She says it's more delicious.

Okay, so the halibut quota system seems to be doing exactly what it was designed to do.

The fish are more delicious.

It's preventing overfishing.

And the death rate for fishermen has plunged.

The key question is fairness.

And you can see from the Alaska case that it is really hard.

It took 20 years for the fishermen to get used to this system.

And there was only a couple thousand of them.

And they still grumble about how it all shook out.

I mean, it's still, at its core, a really difficult job.

When I went out with Christy and David, they only caught six fish.

All day long.

The whole day.

The thing is now, they can go out tomorrow.

I guess we'll see what happens.

Fishermen are eternal optimists.

That was Planet Money editor Jess Jang out on the fishing boat in 2015.

We're back now with our professor, Alex Tatelboim.

Professor, the fishing market is interesting because the problem is so obvious.

A totally unregulated market wouldn't work.

They would just catch every last halibut.

There would be none left.

This is the classic collective action problem we always talk about here on Planet Money.

Well, it's a fishery.

And so the

problem that often happens in fisheries is what we call the tragedy of the commons.

Ah, famous one.

That's right.

And the tragedy of the commons happens when individuals, fishermen here, they're acting in their own self-interest.

They're trying to catch as much fish, make as much profit, but they end up overusing and depleting a shared resource, which is the fishery.

So when I go out to fish, I get as much fish as I can, but that slows down how much fish is able to reproduce.

And so that means that you, Robert, who might also be a fisherman, is not able to catch as much fish.

And one of the important things about the tragedy of the commons is it's not because people are terrible, right?

It's not because, like, I want to hurt everyone else.

Absolutely not.

People are acting in their reasonable self-interest.

These fishermen are commercial fishermen.

They're trying to make as much profit as possible.

But their individual actions turn out to be against the long-term interest of the fishing community.

So they could all be better off by fishing less, but it requires all of them to coordinate and fish a little bit less.

So we have this great example in the fisheries, but we see this in our everyday life.

I mean, this happens everywhere, right?

Yeah, we see it in everyday life.

I have two kids.

One is four, the other one is almost three.

And they go to nursery.

And during break time, they go out into the little yard and they play and there are a lot of different toys and some of the toys are really nice and some of the toys are not so good but what you often see kids do is that they end up fighting over or because they're British kids they often queue up for the really nice toys and at the end of break time some of the kids end up not playing with any toys at all This must break your heart as a father and as a market designer.

You're like, there need to be rules here.

Absolutely.

So every time I go and see them play, I just think, hey, it would be so much better if we just shared out the time.

Everyone could get a bit of time on each toy.

You wouldn't have to queue and wait quite so long.

You could all have a really good time playing with some of the toys.

But they're so keen to get this one particular toy, they all end up hurting themselves.

They always ignore the economists,

even as toddlers.

That's exactly right.

It really doesn't help having a dad who's an economist.

So in the Alaska story, when the Fisheries Council realizes how dangerous the market is, they step in and do two things.

They allocate the resource.

They say, this is how many fish you can take.

But then they make that share transferable.

And it seems to me like this is the key thing.

If someone like me, Robert Smith, got the quota, it would take me weeks just to catch one fish.

But if I can sell my quota to someone else, like Carcass, maybe, then he can, in theory catch the fish much quicker than I can.

That's right.

And this is what we've seen in the practice of using these kinds of transferable quotas, is that in markets where they have been introduced, you end up with much bigger boats, with a lot fewer people fishing, and you often end up catching fish at a much lower cost.

This principle, of course, can be seen in all sorts of markets.

There are tradable quotas for water in some places in the West, for instance, so that farmers and cities can balance out who can most effectively use water from a limited source.

And we've seen governments cap pollution, but allow factories to trade the quotas, so there's an incentive to clean up your smokestacks.

We'll be back with our professor after our next case study that brings us into the world of auctions.

In fact, it is the mother of all auctions.

And some people figured out how to hack it.

After the break.

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Welcome back, students.

A market is a place where buyers and sellers interact.

And one great way to do that is through an auction.

And boy, do we love auctions here at Planet Money.

We've been out to farm equipment auctions, Christmas tree auctions.

We even considered auctioning off eggs a few months ago.

But this next case study is perhaps the largest, most complicated auction we have ever talked about.

And it had a fatal flaw.

Keith Romer and I told the story in 2020.

Ron Bruno worked in TV his entire life.

I used to work at a CBS affiliate right here in our hometown of Pittsburgh.

Which was when Ron decided he might as well start running his own TV station.

He partnered with a woman named Debbie Goodworth and built 11 stations.

And hence we became the Bruno Goodworth Network.

WBGN.

Ron Bruno was the president.

He prided himself on broadcasting local events.

They showed reruns of Cagney and Lacey in a show called U.S.

Bounty Hunters.

On Saturday nights, there was a horror movie show called It's Alive.

The local commercials were incredible.

This portion of It's Alive is brought to you by Ralph's Army Surplus.

Ralph's Army Surplus, located in the center of Monroeville, PA.

As soon as you enter the store, you'll be facing one of the area's largest selections of new and used army apparel, including the new digital camo design.

Oh, digital camo?

Is that all?

But that's not all.

Ralph's has camping equipment, tents, sleeping bags, knives, so much to choose from, you'll be blown away.

Was it a fun job?

Did you like the job?

Oh, yeah.

TV's in my blood.

But seven or eight years ago, Ron got a mysterious phone call.

It was from a broker representing an unnamed buyer.

The broker asked, was there any chance you might consider selling WBGN?

Did they say

why they wanted to buy your stations?

No, no, no, of course not.

But Ron had heard rumors from other small TV station owners across the United States, private equity firms, Wall Street guys, were buying up mom-and-pop TV stations.

Ron was not going to be lowballed on the price by some finance guy in a fancy suit.

He haggled with the broker.

They finally settled somewhere north of $7 million.

Ron didn't want to tell me exactly how much.

And that was it.

Ron was done with WBGN.

Normally, private equity firms specialize in buying up poorly run businesses, fixing them up, and selling them again.

But that is not why the buyer wanted Ron's station.

They didn't want the high school football games and that sweet, sweet ad ad money from Ralph's Army surplus.

They wanted something much more valuable, a chunk of the electromagnetic spectrum.

Allow me to explain.

The airwaves around us are like a super highway.

Each radio station gets its own frequency, its own lane on the highway.

Also, TV stations like Ron's, they get their own lanes, their own frequencies.

Now, in the old days, you could just apply for a frequency, and the FCC, the Federal Communications Commission, would give out radio and TV stations using a lottery system.

A dentist could win the TV frequency in Boston and then end up selling it for a lot of money.

It was not an ideal system.

Then, an even bigger problem starts to crop up for the FCC.

Because the airwaves, the super highway in the sky, it was becoming more and more crowded.

They were running out of lanes.

The reason was the object you might be holding in your hand at this very moment, the cell phone.

The cell phone uses the same frequencies as TV stations.

And for years, the cell phones sort of squeezed between other people's frequencies like a motorcycle through a traffic jam.

But cell phones, as you may have noticed, started to demand more and more bandwidth.

1G, then 2G.

3G, 4G,

LTE, 5G.

Where were all the cell phone signals going to go when the airwaves were crowded with Cadney and Lacey reruns and high school football games?

There wasn't room for everything.

Eventually, the problem got so bad that the FCC decided they had to figure out a way to basically tear down the superhighway with all the TV stations and all those lanes and just build a new one from scratch.

This is a classic problem in economics, how to reallocate a scarce resource to the people who will make the best use of it.

Ladies and gentlemen, may I introduce you to the solution?

An auction.

For decades, the FCC had been playing around with auctions to sell the TV frequencies instead of just giving them away to dentists.

But in order to really free up a lot of room in the air for the cell phones, they were going to need the mother of all auctions.

And there is this branch of economics called auction theory, and they have all these cool little variations on the basic auction format.

Some auctions are blind.

You don't know who's bidding what.

Some auctions are not for buyers where the price goes up and up and up, but actually reverse auctions for sellers where the price goes down and down and down until there's only one seller left.

This new auction would need to be a mashup of all of these.

An auction that would coordinate between hundreds of TV stations who had frequencies they might consider selling and all these cell phone companies that might just want to buy.

So many different transactions.

It was a complicated problem to solve because they decided they wanted to do everything all at once.

This is Glenn Weil, former professor at the University of Chicago, big-time auction enthusiast.

Glenn says that this new auction needed to completely reimagine the spectrum superhighway.

And that requires writing some like enormously complicated computer code to like do all of that Rubik's Cube solving.

So

each owner of, let's say, a TV station had to decide if they wanted to sell it for how much, like

a secret number.

Is that right?

Exactly.

The minimum amount that they would require to sell it.

Okay.

And then these telecommunications companies, the cell phone companies, they had to decide

what frequencies they wanted and how much they were willing to pay.

Exactly.

That sort of creates a kind of supply and demand.

And if those sort of intersect and leave enough money for the government, then you say that the auction is over and it worked out.

To pull this off, the FCC turned to a team led by maybe the greatest auction designer in the world, an economist named Paul Milgram.

It was so complicated that it took years to set up the rules and all these super powerful computers to run the calculations.

They called it a two-sided simultaneous incentive auction.

Two-sided because there was an entire market of players buying and selling, simultaneous because everyone was bidding at once, and incentivized because it was designed to bring every last TV station to the table.

And it was the most glorious thing anyone had ever seen.

There were all these built-in incentives for both buyers and sellers to just set their prices based on how they actually valued their licenses.

It was market efficiency, impossible to outsmart.

Glenn Weil says he was at work when he figured out that was not, in fact, the case.

I have a very, very clear memory.

I was in a seminar

at Microsoft Research, where I worked at the time, and there was a presentation by someone who was a colleague of mine and who was involved in the auction design.

And

he was saying, oh, this auction can't be gamed in the following ways and so forth.

And someone in the audience raised their hand and said, what do you mean it can't be gamed?

One of my friends is making a bunch of money exploiting the auction.

The players who were exploiting the auction were private equity and the smart people they hired to figure out how to make a lot of money.

My name is Coleman Baslon and I'm an economic consultant with the Brattle Group.

During the big spectrum auction, the two-sided simultaneous incentive auction.

Let's just call it the Super Bowl of auctions.

Coleman was advising one private equity firm, although he won't use that term and he won't say which one.

I worked for a bidder that was on the television station side

that bought television stations to bid into the auction.

Somebody who bought TV stations for the sole purpose of selling them into this auction.

Yes.

He may have been the one who advised the private equity firm that bought WBGN, Ron Bruno's station in Pittsburgh.

Coleman didn't say.

He's very discreet.

We've been using this metaphor of a super in the sky.

And you know how whenever someone wants to build a highway in the real world, there's always some rundown farmhouse in the way that doesn't really want to sell, and the government has to pay way too much money for that farmhouse.

The private equity firms, they essentially bought all these key farmhouses, these key pieces of the spectrum, blocking the new spectrum superhighway.

But the plan was not to stop the highway, to block the auction altogether.

It was just to make it more expensive.

Private equity and their consultants figured out which frequencies the FCC's computers valued the most, the frequencies you really needed to make the whole reorganization work.

Once you had those, you could drive up the prices for all the TV stations, which Private Equity happened to own a lot of.

The game was on.

March 29th, 2016, the start of the most complicated auction in the history of humanity.

And one of the longest.

By the time all the buying and selling and bidding wrapped up, a year had gone by.

And

it mostly looked like it worked.

TV stations sold their frequencies, the cell phone companies bought them up, the U.S.

government made a profit of $7 billion.

But when economists went back and looked at the numbers, they found that the private equity firms had grabbed hundreds of millions of dollars extra for themselves.

By spotting that flaw in the auction, by holding out on the superhighway, they had bid up the price of their TV stations.

Was that fair?

I asked a version of that question to Ron Bruno, the owner of the long-departed and sorely missed WBGN.

And in retrospect, do you,

like, knowing everything that you know now, would you still have made that deal?

You know, that's the magic question.

And I ask myself that all the time.

By the way, we looked it up.

Those Wall Street guys sold the frequency of five of WBGN's 11 stations into the auction for $74 million,

more than 10 times what they paid Ron.

Keith Romer reported that story in 2020.

After the break, we'll ask the market designer how to spot people messing with our markets.

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We are back with Alex Tatelboin, professor of economics at the University of Oxford.

Our story told us about something called a double auction.

So in other words, there were a lot of sellers, TV stations, and a lot of buyers, telecommunications companies.

It sounds exotic, exotic, but there are actually a lot of examples of double auctions in our lives, right?

Absolutely.

So think of the New York Stock Exchange.

So in the New York Stock Exchange, the buyers submit bids to get shares and then sellers submit asks to sell those shares and there's transactions happening all the time.

So there's many examples of double auctions.

Another one's the electricity market.

Generators offer to sell electricity and utilities bid to buy this electricity from them.

What can go wrong in these double auction markets?

And we sort of hinted at it a bit in this story.

Well what can go wrong in this market is that some market participants would have what we call market power and it's their ability to skew market outcomes in their favor at the expense of efficiency.

So an example of that in the stock market say is there are occasions when one giant buyer wants to accumulate a position in one company or one company wants to dump a lot of stock that can influence the stock market.

And at that point,

their actions can actually just change the price of one stock.

It doesn't happen in stock markets very often, but that's exactly the sort of thing that you might worry about.

We usually think of markets working well and being competitive when no single participant can really meaningfully influence the price.

So what can you as a designer, what can we as a society do to make sure that there aren't large, powerful players that are skewing the beauty of the market, the efficiency of the market?

So one thing that we often do is we encourage competition in the market directly.

So the more participants in the market, the better.

Alex, I feel like we've been assembling a list of what makes a great market.

You want plenty of competition.

Everyone should have the same information.

You want rules against collusion.

And I guess it leads to something efficient.

To an efficient and to a fair outcome.

It's not just efficiency that really matters for a lot of market design.

And the reason is that market participants need to accept what the market design ultimately is.

And if the market allocations are really unfair, often people might say that this design is no good and not wish to participate.

We're coming to the end of our class.

So Alex, it's time for our vocabulary words.

We talked about tragedy of the commons.

What is that again?

The tragedy of the commons happens when market participants who are acting in their self-interest

deplete a shared resource in a way that means that's against their own community outcomes.

So we talked about two-sided auctions like the stock market or the spectrum auction we talked about.

And there's something that can ruin those kind of markets and it's called market power.

What is market power?

Market power is when a single market participant can influence the outcomes of the market in their favor at the expense of everyone else.

Our students can take these words with them, and that way, when they see something wrong in the world, rather than getting upset, they can say, we should just redesign this market.

Alex Tatelboyen, professor of economics at the University of Oxford.

In England.

Thank you so much for coming in.

Thank you so much, Robert.

It's a pleasure.

Okay, students, only one class left before our final exam and graduation ceremony.

Start studying now.

We'll have an online quiz, and if you pass, you will receive a diploma suitable for social media bragging and legally, not much else.

And for those of you in New York, hope to see you on August 18th for our live show.

If there are tickets left, if

you can get them in the show notes.

Summer School is produced by Eric Menel and edited by Alex Goldmart.

It was fact-checked by Emily Crawford.

Devin Meller is our project manager and the show was engineered by Santa Lafredo.

I'm Robert Smith.

This is NPR.

Thanks for listening.

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