Comment by JoshPurtell
2 days ago
The basic idea is this. The customer has some "curve" that represents how much he values different outcomes. Maybe he values good outcomes at $1, and great outcomes at $100. The supplier also has a cost curve - by definition, it will cost him more to supply a great outcome than a good outcome (otw he'd just always supply the great outcome).
Setting a fixed price is a simple way to help these two parties transact. But hypothetically, it may be more efficient - e.g. you will let more mutually-beneficial events happen - to ask both parties for what their number is for a given event, and having both transact when the numbers are far enough apart (cost is $10, value is $100).
The problem is, you can't directly ask the parties, because they don't want to reveal how high/low they're willing to go for no reason. So, you should essentially structure your questions into a pre-defined algorithm so that everyone is incentivized to reveal at least the ballpark of where their cost/value is. The study of how to structure those questions is a subset of mechanism design / information design, which is a branch of Econ related to game theory
FWIW, if this sounds like arcane academic musing ... applied mechanism design for a while was essentially just the study of google ad auctions, and Google invested very very heavily in researchers to figure out how to do this for them
Very very interesting. It makes a lot of sense. I appreciate you sharing.
Definitely digging deeper into this now. I think it becomes more and more important as models improve.