Al Roth on Matching Markets

The system that runs the ride-sharing company Uber doesn't just link up passengers and drivers based on price. It also has to connect the two based largely on where they are geographically. It is, says Nobel laureate Stanford economist Alvin E. "Al" Al Roth, a matching market.

In this Social Science Bites podcast, Roth explains to interview David Edmonds some of the ins and outs of market matching, starting with a quick and surprisingly simple definition.

"A matching market is a market in which prices don't so all the work," Roth details, "So matching markets are markets in which you can't just choose what you want even if you can afford it – you also have to be chosen." But while the definition is simple, creating a model for these markets is a tad more complex, as Roth shows in offering a few more examples and contrasting them with commodity markets.

"Labor markets are matching markets. You can't just decide to work for Google – you have to be hired. And Google can't just decide that you'll work for them – they have to make you an offer." And like say university admission, matching markets require something to intervene, whether it be institutions or technology, to make this exchange succeed. In turn Roth himself helped engineer some high profile matches in areas where the term 'market might not traditionally have been used: kidney donors with the sick, doctors with their first jobs, or students and teachers with schools. Or even the classic idea of 'matchmaking' – marriage.

Roth turned to game theory to help explain and understand these markets, and his work won he and Lloyd Shapley the 2012 Nobel Memorial Prize in Economic Sciences. As the Nobel Committee outlined:

"Lloyd Shapley studied different matching methods theoretically and, beginning in the 1980s, Alvin Roth used Lloyd Shapley's theoretical results to explain how markets function in practice. Through empirical studies and lab experiments, Alvin Roth demonstrated that stability was critical to successful matching methods."

Roth is currently president of the American Economics Association, and sits as the Craig and Susan McCaw professor of economics at Stanford University. He is also the Gund professor of economics and business administration emeritus at Harvard University