Matching markets

Apr 16, 2023
Heartbeat line on red apple and stethoscope, healthy heart diet concept background.

‘The market’ and ‘life-changing interventions’: two phrases that aren’t normally seen in the same sentence.

But increasingly, the market, through innovative design, is leading to life-changing, even life-saving, results.

As calls grow for better services and outcomes for Australians, innovative market designs have a key role in providing a bigger bang for the buck in a range of government spending – from the National Disability Insurance Scheme and aged care, to health care and training – a worthwhile goal at a time the federal budget is under pressure.

“Matching markets” is one example of innovative design that has been around for some years. Several winners of the Nobel prize in economics over the past two decades have worked in this area and, in particular, designing markets to achieve better social outcomes.

A life-saving application is the kidney exchange system. Previously, a husband may have wanted to donate a kidney to his wife, but their blood types were incompatible, making the donation impossible. Often, donations were also limited to geographical areas or particular hospitals.

By using a “matching market”, incompatible donor-patient pairs are matched with similarly incompatible pairs so that each patient receives a kidney from a compatible donor. Such co-ordinated exchanges provide many more matches than if individual donors and hospitals were left to their own devices – thus saving many more lives for a given pool of donors.

Closer to home, another innovative market design led to a huge increase in the quality of life of children with autism. The Northern School of Autism, which opened in 2012, drew students drawn from all over the metro area of Melbourne. While the bus travel was free, the geographical spread of the students was vast.

Transport involved three legs for the senior students: from home to a local pick-up point, on to the junior campus and then a shuttle leg to the senior campus. The second leg arrived at the junior campus for the 9am start of classes. Senior students arrived 30 minutes later at their campus, which not only shortened their education time but disrupted the teaching for all senior students. Research also showed that students became ‘more hyped up’ the longer the travel time, with some needing extra assistance before they were ready to participate in learning activities.

Students also had to leave before the end of the school day to catch the shuttle back to the junior campus. Parents reported similar emotional issues when their children arrived home, which increased the anxiety and tension in the household.

The state government decided to trial a bus pilot scheme to see if it was possible to significantly reduce travelling time without increasing the cost of the service. I implemented the trial as a parliamentary secretary in the Andrews Labor government in 2014, commissioning experts from the University of Melbourne’s Centre for Market Design and the renowned California Institute of Technology. They designed a scheme that used algorithms to determine the optimal travel route; the optimal vehicle size; and the prices at which services were provided.

Travel times were long because the standard bus used was large and made many stops to pick up students. In the trial, a maximum travel time was set of one hour each way, and the algorithms then determined the optimum bus size and the routes.

The results were extremely positive. The average travel time was cut from 66 minutes to about 29 minutes for the morning service, resulting in much happier children and parents, and a better learning environment.

One rationale for outsourcing is that the free market is able to offer a greater range of services. The free market works well for simple products and services where price is the key determinant.

However, with many government-funded services becoming increasingly complex, price does not guarantee a good outcome. In disability or aged care services, for example, a person’s primary concern is often quality of care. A low price will not counteract concerns about poor care and will not induce the person to choose a particular supplier. Furthermore, an older person might need a suite of care services to remain living in their home but can’t get all the services from one provider. It is difficult for them to navigate the market to access all the services they need.

Many people who are supported by the NDIS might need a range of services that are not available from a single provider – a wheelchair, occupational therapy and direct care, for example.

Furthermore, some suppliers may provide services targeted to a particular subset of consumers – to people of a culturally and linguistically diverse background, for example. Or a supplier may not want to sell to a particular consumer no matter what price is offered.

In areas of complicated service delivery and/or for services that are not easy to source or put a price on, the free market cannot provide the best outcomes for people.

Effective service delivery is also a two-sided match. The personal connection between the person and the service provider is important, as those of us who “shop around” for a GP or health specialist would attest.

For a range of social/environmental/human services we want people to get what they need from the market, with price still playing a key role. Innovative market design can ensure the best social outcomes.

However, regulatory help is required, which includes a process to determine benchmarks that describe the attributes of the goods and services that are sought. It also must ensure people can cheaply and routinely search the market for the services they need.

Such a co-ordinated approach isn’t anti-market. It is about effecting preferences through choice in a way that empowers all participants in the market. Leaving consumers and providers to their own devices doesn’t work nearly as efficiently as a co-ordinated approach.

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