After reading some of the work on market design by Alvin Roth and Lloyd Shapley that earned them the Nobel Prize in Economics this year, I realized it has some implications for those of us in the start-up and social media/gaming space. In particular, the underlying research on market design could help make raising capital more efficient.
It is interesting to understand the underlying principles of market design that Roth and Shapley helped explain. According to the theory, there are many markets that operate where the assumption of perfect competition is not satisfied. There are many goods that are individual and heterogeneous, whereby the market for each type of good becomes very thin. A great example is tech and social media start-ups. Each company is different and there is not a direct trade-off between investing in company A and company B, as each has a different management team, concept, etc.
If a worker is hired by Employer A but would have preferred to work for Employer B, who also would have liked to hire this worker (but did not), then there are unexploited gains from trade. If employer B had hired the worker, both of them would have been better off. Shapley, in research with David Gale, defined a pairing to be stable if no such unexploited gains from trade exist. Continue reading “How Nobel Prize winning market design theory can help social media and tech companies”