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A market is the group of existing or potential buyers of an offering.

Source: Roth, Alvin E., (2007), The Art of Designing Markets, Harvard Business Review, October, 2007, p 118-126

Traditional economics views markets as simply the confluence of supply and demand. A new field of economics, known as ""market design,"" recognizes that well-functioning markets depend on detailed rules.

To function properly, markets need to do at least three things.

  1. They need to provide thickness -- that is, to bring together a large enough proportion of potential buyers and sellers to produce satisfactory outcomes for both sides of a transaction.
  2. They need to make it safe for those who have been brought together to reveal or act on confidential information they may hold. When a good market outcome depends on such disclosure, as it often does, the market must offer participants incentives to reveal some of what they know.
  3. They need to overcome the congestion that thickness can bring, by giving market participants enough time-or the means to conduct transactions fast enough-to make satisfactory choices when faced with a variety of alternatives.

A primary motive for market design is the need to address market failures. Two developments in economics came together to form the field of market design. One was game theory-the study of the ""rules of the game"" and the strategic behavior that they elicit. By the 1990s it had matured to the point where it could offer practical guidance. In this it was helped by another new methodology, experimental economics, which provided tools both for testing the reliability of game theory's predictions and for testing market designs before introducing them into operating markets.