Monday, October 15, 2012

Matching: A Nobel Prize, and Some Evidence from Networks

The Nobel Prize in economics in 2012 was given to Lloyd Shapley and Alvin Roth for their contributions to the theory of matching. Matching is when two sides of a relation needs to find a suitable other in order to make something of value. For example, workers need to be matched with jobs that match their skills and interests, students need to be matched with schools and subjects, and cargos need to be matched with ships and routes. Each match can have varying quality, and an objective may be to get the best possible match quality in total – but of course that does not mean that each individual match is perfect. In fact, often the best one can do is to make sure that the match is stable, meaning that nobody wants to trade places. Because the units that are being matched are selfish, so they don't care about the total quality of matches, only their own match quality, the theory and practice of matching is complicated and well worth studying. In fact, it gets even worse if one lets the quality of matches become uncertain, but that is another field of research again. 

Most of the matching studies have been in markets that have been allowed to operate freely, or have been given specific mechanisms to improve efficiency. Economists are particularly interested in efficient markets, and Shapley, Roth, and others inspired by them have made great progress in market matching. To show some of the range, Roth has been involved in applications as varied as medical resident assignment, school choice, and organ donor matching.

Management scholars have recently taken an interest to matching too, but in a different context: networks. The idea is that we now know much about what networks do, but not enough about where they come from. Matching seems like a logical explanation because networks in business are relations where two sides need to find a suitable other in order to make something of value. That's exactly a matching problem. Following that logic, Hitoshi Mitsuhashi and I found that alliances in the shipbuilding industry could be explained by matching based on compatibility of resources and complementarity of markets. Moreover, alliances that are better matched also show better performance.

That study was done on firms operating trans-oceanic container routes, which means that they are sizable corporations. But it also works for small entrepreneurs who are making interpersonal networks to start a new business. Balagopal Vissa looked at their intention to form a tie with others they had met and the actual establishment of exchange between the two ties, and found that – again – compatibility and complementarity played a role, this time in the form of social similarity and task complementarity.  Entrepreneurs want to be reassured by having someone similar to themselves on social dimensions in the other firm, but they also want the businesses to complement each other in value creation.

For network scholars, this is a new way of thinking because it means looking inside each node in the network and comparing it with the others. Now it matters who you are and what you can do. For those who are used to thinking about matching, that has always mattered, so it is an easy logic to follow. It is a powerful combination of ideas, and now matching is becoming increasingly important to understand the networks that connect firms, both large and small.