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Notes on Market Clearing Prices

Lecture Note: Link

What happens in a market: SOMEONE gets SOMETHING from SOMEONE, and then possibly pays a PRICE.

Given a market, three questions can be asked:

  1. "Does a participant care about the identity of the transaction partner?"

Here we have matching markets (i.e., the identity matters) or the markets for goods (i.e., only the item and the price matter, but the buyer/seller does not matter.)

Question: Exactly how is a matching market defined? Is "caring about the identity" a sufficient condition?

  1. "Is money involved?"

In other words, are there prices? One example market without prices is online dating platform such as Tinder.

  1. "Are goods fungible or idiosyncratic?" Fungible means interchangeable (e.g., shares for the same company), idiosyncratic means each item is different from other items (e.g., the valuation of them are different for different buyers).

The above definitions are all quite high-level.

An example

Online advertising market, where participants are (i)(i) advertisers and (ii)(ii) companies such as Google, Meta, and X. The goods are ad slots.

  1. The participants should care about the identity of the transaction partners. From a buyer's (i.e., advertisers) perspective, an ad slot on Instagram (i.e., Meta) is different from an ad slot on a google search result, possibly due to differences in target audiences. From a seller's (i.e., the companies) perspective, they might refuse to do transactions with un-reputable advertisers (e.g., scamming sites), despite that theses advertisers are willing to pay higher prices.

    Nevertheless, sometimes the above assumptions do not hold. See this.

  2. There is certainly money involved. Advertisers bids for ad slots, and companies profit from these auctions.

  3. The goods are idiosyncratic, even for the same company's platform, say Instagram at Meta. Ads at different locations on a pages are valued differently. See page 2 of this paper: Aggarwal et al. 2024.

This note focuses on markets for goods with prices, where the goods can be either fungible or idiosyncratic.

The single fungible good case (E.g., shares of the same stock)

The notion of market-clearing price is well-defined here.