Market Engineering: A Research Agenda
Market engineering is the discipline of making markets work. It encompasses the use of legal frameworks, economic mechanisms, management science models, and information and communication technologies for the purposes of: (i) designing and constructing for
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Institute of Information Systems and Management, University of Karlsruhe, Germany 2 School of Electronics and Computer Science, University of Southampton, UK 3 InterNeg Research Centre, Concordia University, Montreal, Canada 4 University of Cologne, Germany [email protected], [email protected], [email protected], [email protected], [email protected]
Abstract. Market engineering is the discipline of making markets work. It encompasses the use of legal frameworks, economic mechanisms, management science models, and information and communication technologies for the purposes of: (i) designing and constructing forums where goods and services can be bought and sold and (ii) providing services associated with buying and selling. Against this background, this paper sets out the need for a coherent and encompassing agenda in this area and highlights the key constituent building blocks. Keywords: Markets, Auctions, Negotiations, Economic Engineering.
1 Introduction – Design Matters In 1899, Leo Baekeland sold the rights to his invention, Velox photographic printing paper, to George Eastman. Velox was the first commercially successful photographic paper ever developed and the price Eastman paid was $1 million. Baekeland had planned to ask $50,000 and to go down to $25,000 if necessary, but – fortunately for him – Eastman spoke first and offered $1 million [1]. From an economic perspective, the main lesson of this short historical example is that the design of markets and negotiations matters. The rules of who discloses information at which time and how the market transforms bids to prices and allocations impact the behavior of market participants as well as the market result. Eastman Kodak Company started manufacturing its newly purchased paper, but they discovered that they were not able to produce photographic paper. Baekeland told Eastman that he should expect troubles because he paid for patent but not for Baekeland’s knowledge. Apparently, it was customary for the inventor to omit one or two important steps from the patent so that those who tried to use the patent without the consent of the inventor would fail. After receiving another $100,000 Baekeland gave the full details of how to produce the paper [2]. What this story indicates is that if one wants to guide behavior of market participants in order to achieve a desired outcome, e.g. an efficient allocation of resources, one has to carefully engineer the respective market. But one may also realize that in H. Gimpel et al. (Eds.): Negotiation, Auctions, and Market Engineering, LNBIP 2, pp. 1–15, 2008. © Springer-Verlag Berlin Heidelberg 2008
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situations when there is one buyer and one seller or only a few of them, they may decide to ignore the market rules, or change them during the course of the transaction. A renegotiation of terms and interactions outside of the market is in such situations possible. Speaking more generally, new markets emerge constantly and their conscious design is important as marke
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