Market design is another important aspect that people tend to forget. We figured out who to incentivise, now we need to set the environment up. There is plenty of academic literature to read up, including Nobel Prize winner, Alvin Roth. Let’s break this pillar down into something easy to understand before jumping into the more complicated things.
More articles in Market Design series:
Why should I care? Is this even important?
You live in a small rural village with only 250 people living there. Everyone has a car. You decide to launch a business like Uber in the city. Considering it’s a small village, everything is within walking distance, there are so little people and everyone has a car, do you think your Uber business will succeed? Probably not really. There is no demand.
Now you live in a big city. Think London or Singapore or New York (choose a big city). Everyone has a car. Everyone drives to work. There is no public transport. However, the city only has ONE main road with 2 lanes in each direction. How do you think it will work? You’ll probably spend 4h a day stuck in traffic. Will you want to live in this city if there is another similar option elsewhere? Probably not. It’s too congested.
Now you give up. Rural and big cities are all not right so you move to a medium sized city. There are public transports and cars available. There is also plenty of space. However, you realize that the city has tons of robbery, drug dealers, homeless people shooting up drugs into their blood and signs of human trafficking. The police in the city also seems to be a cahoot with the mafia. Would you want to live there? It’s too unsafe.
What should I take note of?
- Thickness (size of network): bring all the relevant parties who want to transact together. Make sure you consider timing of transaction like when should offers be made and how long it can be left open.
- Ease of congestion (reduce congestion in the network): make sure that there is sufficient time to consider the options. Otherwise, there are too many offers and no time to consider them (aka congestion). You can resolve this issue by having the system to help people make better choices. For instance, ranking choices so people make better decisions or make verification super cheap or free so the system isn’t cogged up with transactions to approve.
- Ease of use (make participation safe and simple): make it easy for people to join and also make it safe for them to join. AKA increase privacy mechanism, fully autonomous coins, reduce information kept about the participants.