Market Design: Harnessing Market Methods to Improve Resource Allocation1

The emerging field of market design applies auctions and matching to solve resource allocation problems. This paper focuses on auction design, the branch of market design where money is used to facilitate the exchange of goods and services. Within auctions, the paper examines applications involving government regulated resources. Who should use the scarce radio spectrum and at what prices? How should electricity markets be organized? How should financial markets be regulated? And how should runway access be assigned at congested airports? All of these are important questions in major industries. Researchers in market design have made substantial progress in answering these questions over the last fifteen years. The efforts, although at the forefront of theory have been closely tied to practice, and involved interdisciplinary teams of economists, computer scientists, and engineers, all working to solve real problems. Despite this rapid progress, the field holds much promise to provide better answers in even more complex economic environments over the next two decades. The rewards to society from improved markets will be immense