Introduction

A basic goal of markets is to achieve a matching among buyers and sellers, or, more generally formulated, a matching between individual agents and physical objects or financial claims. In a commodity market (such as the market for gold) the price determines whether an agent decides to buy or to sell. But in many other markets (such as regulated labour markets, government-sponsored auctions or Beauty Contests for UMTS licences) the roles of the agents are relatively well defined: each agent operates on only one side of a bilateral market.

In auctions and in decentralised markets consisting of systems of overlapping bargained agreements the physical allocation of objects is accompanied by a determination of prices. In contrast, many other bilateral markets operate only on the matching dimension since, for various institutional reasons, money either does not enter the system or prices are determined exogenously. For example, many entry-level job markets focus on matching new graduates and potential employers at more or less fixed wages.

The theory of two-sided matching offers fundamental insights into the functioning of markets and identifies the main issues arising in the design of such markets. In particular, once money and prices are introduced in the models, this theory offers the basis of auction and market design. Moreover, there exist well-documented and successful large-scale applications that can guide further practical work. A broad conclusion is that markets require a good deal of organisation.