Smart market

A smart market is a periodic auction which is cleared by the operations research technique of mathematical optimization, such as linear programming. The smart market is operated by a market manager. Trades are not bilateral, between pairs of people, but rather to or from a pool. A smart market can assist market operation when trades would otherwise have significant transaction costs or externalities. A smart market is a periodic auction which is cleared by the operations research technique of mathematical optimization, such as linear programming. The smart market is operated by a market manager. Trades are not bilateral, between pairs of people, but rather to or from a pool. A smart market can assist market operation when trades would otherwise have significant transaction costs or externalities. Most other types of auctions can be cleared by a simple process of sorting bids from lowest to highest. Goods may be divisible, as with milk or flour, or indivisible, as with paintings or houses. Finding a market-clearing allocation corresponds to solution of a simple knapsack problem, and does not require much computation. By contrast, a smart market allows market clearing with arbitrary constraints. During market design, constraints are selected to match the relevant physics and economics of the allocation problem. A good overview is given in McCabe et al. (1991). Combinatorial auctions are smart markets in which goods are indivisible, but some smart markets allocate divisible goods such as electricity and natural gas.