How to use data to design the best market for your company

Can you use technology to create the market your business wants? Behavioral economics say, ‘yes’ — and thanks to big data it’s about to become a service any business can access.

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Your business spends a lot of time analyzing the market you sell to, but can you take a step back and instead create the market that you want? Experts in the little-known field of behavioral economics and market design say “yes.”

“Market design says ‘we don’t always get the outcomes we want so let’s tweak the markets and yet still harness market forces’,” says R Preston McAfee, Microsoft’s chief economist. It’s a set of principles that explains market behavior and allows us to predict and even change it, with incentive and other tools.

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“It bears the same relationship to traditional economics that engineering bears to physics,” McAfee explains. It’s been around since the 1980s and it’s used for assigning physicians to medical residencies as well as for spectrum auctions (which he advised the FCC on), with about $100 billion spent through each of those markets. “It’s accepted technology, but it’s almost unheard of.”

That’s changing. Google and Amazon also have chief economists (and McAfee himself previously held similar roles at Google and Yahoo). Market design could be the latest prohibitively expensive discipline to be automated and go mainstream, he suggests. “Traditionally, you hired a brilliant person who did a handcrafted market design. This is about to change, and it's about to change because of big data. Sensors, data and machine learning allow an entirely new type of market design, the automation of market design.”

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