How to navigate matching markets where price alone doesn’t determine the outcome.
In this episode you’ll learn:
- How matching markets differ from commodity markets.
- Why is the median age for marriage getting older.
- Why signaling is important in matching markets.
- How technology can lead to both a thicker market and congestion.
- How to navigate matching markets.
Finding The Perfect Match
We really weren’t planning on buying another house. We moved into our current home only six months ago, and we still have work to do before it is completely finished. There are only two or three Eichler-style mid century modern homes in our town, a style which fascinates us because of its aim to “bring the outside in” with large windows and an open floor plan. Rarely have we seen one for sale in our area.
Thick and Thin Markets
The market for Eichler-style mid century modern homes in our town is thin since most of the time this style of home isn’t for sale. A thick market, according to Alvin E. Roth, author of “Who Gets What and Why: The New Economics of Matchmaking and Market Design,” is one in which there are many participants, both buyers and sellers, who want to transact. Eichler-style homes are also not a commodity market in which price is the primary determinant of whether a transaction takes place, and where a buyer can buy from any seller and a seller can sell to any buyer. Rather, the Eichler-style home buying market is a matching market in that buyers select and negotiate to buy a specific house, and the seller chooses whether they want to sell to the specific buyer. The transaction is relationship-specific. If you want to get a job, enroll in college or find a spouse you have to navigate a matching market, because it is not enough to make a choice and move forward with the transaction. The other party must choose you among competing candidates.
Commodity and Matching Markets
Some markets that used to be matching markets such as agriculture products are now commodity markets due to standardization. For example, potatoes in Idaho are rated as “No. 1” and “No. 2”, with No. 1 grades being more oval in shape with very few if any defects in terms of knobs or eyes. Standardization allows a potato buyer to buy from any seller without having to inspect the individual shipment before purchasing a load of potatoes. Roth writes, “Marketplaces can help organize potential transactions so that they can be evaluated fast enough that if a particular deal falls through, other opportunities will still be available. In commodity markets, price does this well, since a single offer can be made to the entire market, but in matching markets, each transaction may have to be considered separately.”
We made an appointment to look at the house that evening. It was for sale by owner so there was no realtor involved. The seller said we could come at 7PM, right after another potential buyer was finished looking at the house. When we arrived at seven, a young couple was leaving. The seller mentioned this was their second time through the house, and that they expected they would make an offer. The seller was signaling to us that there was a lot of competition for the house and that if we wanted it we would have to move quickly Signaling is critical in matching markets. Since there needs to be mutual agreement before a transaction can occur, signaling allows a buyer or seller to convey not only what an attractive candidate they are but how willing they are to enter into a transaction. Signaling helps sellers sort through competing offers to determine who is really interested.
The Common Application has made it much easier for students to apply to multiple colleges in the U.S., making the market thicker. But it also means colleges have a lot more applications to sort through, which can lead to a congested market. Congestion occurs according to Roth when it is “impossible for participants to identify the most promising alternatives.” By requiring an additional custom essay or by noting which student candidates take the time to visit the campus, colleges receive signals as to which applicants are really interested in attending their school.
Convincing the Seller
My wife, LaPriel and I spent about forty-five minutes touring the house, but neither of us realized how much the other liked it. Only after we were outside by our car did we realize we both wanted to buy the house. So we knocked on the front door and let the sellers know how interested we were. Now our job was to convey to the sellers why we were the ideal buyer. The sellers wanted to make sure we would be good neighbors, that we would make a fair offer and that our time frame for concluding a transaction matched theirs. They wanted to make sure we could be trusted to go through with the deal. The sellers were taking a risk in entering into a purchase agreement with us because they needed the funds from the closing of their existing house to purchase their new house. By agreeing to sell to us, they could no longer court additional buyers, perhaps one that could close the transaction sooner than we could. Many offers are made with strict expiration deadlines. These “exploding offers” allow the buyer to return to the market quickly in order to hopefully acquire their second choice.
The Market Spectrum
Roth writes, “There is tension between commodity markets and matching markets. You care who brews your coffee, but your coffee shop sells to all comers. That is, in the market for a cup of coffee, your coffee shop has to be chosen, but you get to choose – and you care whom you choose. So the distinction between perfectly anonymous commodity markets and relationship-specific matching markets isn’t a think bright line. Rather, there are markets at different points along a spectrum from pure commodity to pure matching.” It is important to know where along that spectrum a market is because it changes how we conduct our transaction. If we treat a job opportunity or a purchase in a tight market like it is a commodity market rather than a matching market, then we will unlikely get what we want because we won’t adequately signal how badly we want what we are seeking. We are hopeful we made a good match and that our home purchase will close next month. Click here to get a new episode summary article each week by email