The inner lives of markets: How people shape them and how they shape us by Ray Fisman and Tim Sullivan PublicAffairs. 2016. ISBN: 978‐1610394925

• DOI: http://doi.org/10.1002/pa.1694
• Published date: 01 May 2018
• Date: 01 May 2018
• Author: Devyani Pande

BOOK REVIEW

THE INNER LIVES OF MARKETS: HOW

PEOPLE SHAPE THEM AND HOW THEY

SHAPE US

by Ray Fisman |Tim Sullivan

PublicAffairs. 2016. ISBN: 978‐1610394925

1|INTRODUCTION

In 1977, Douglas North remarked, “It is a peculiar fact that the

literature on economics …contains so little discussion of the central

institution that underlies neoclassical economics—the market.”He

would have been rather pleased by the comprehensive take of

Fisman and Sullivan on markets in the book The Inner Lives of

Markets.

The book was conceived as a result of the authors deciding to

explore the most influential academic papers in the field of Economics

after World War II till the early 2000s. The successful collaboration

between Ray Fisman, Professor of Behavioral Economics, and Tim

Sullivan, Editorial Director of the Harvard Business Review, is evident

with the focus on economic theories that shaped the discipline over

the years and illustrative examples of real‐world scenarios with the

common theme of markets.

The authors begin with the story of a post‐World War II prisoner

of war camp in Germany where a barter system involving groceries

gave rise to a perfectly functioning market. The existence of such a

market saved the lives of people, who would have otherwise not been

able to survive with the Red Cross care packages that did not coincide

with their “preferences.”This narrative serves a background to the

recurring theme of how markets unravel.

To put the evolution of the discipline of Economics in perspective,

the authors start by discussing about the wave of economic modeling

that involved a shift from theory to using mathematics for a lucid and

crisp description of the functioning of markets. Von Neumann

Morgenstern'sTheory of Games and Economic Behavior laid the founda-

tion for the use of mathematical science in Economics, and the works

of Samuelson, Kenneth Arrow, and Debreu on general equilibrium

followed. The latter breed of economists laid out the conditions under

which market equilibrium would exist. This was a starting point for the

research on imperfections in the market system that might distort the

equilibrium.

The case of market failure due to asymmetric information with the

backdrop of Akerlof's basic “lemons and cherries”theory

1

and adverse

selection is an illustration of the approach of the authors in explaining

the implications of economic theories on markets today. The existence

of gaps in information in markets can lead to complete collapse of the

markets. This is particularly relevant in the day and age of e‐commerce

where internet makes for an easy and convenient space for possible

misrepresentation of products by sellers, on websites such as eBay

and Amazon.

However, overtime, through reputation scores and other innova-

tive instruments, the buyers have been able to separate high‐quality

sellers from those selling lemons to a certain degree. Because the

online reputation had long‐term effects on their sales, buyers and

sellers did not cheat each other despite the economic benefits of

doing so. The authors delve deeper into this issue by discussing

Michael Spence's theory of signaling where businesses have success-

fully been able to signal their integrity by making claims that are very

difficult for the “lemons”in the market to mimic. However, the

authors warn that the existence of asymmetric information provides

the scope for people to make money, unless a technology can end this

asymmetry.

In the process of tracing developments in economic theory and

change in markets overtime, the authors recognize the diversity in

the nature of markets. This is followed by elaborate discussions on

auction markets, platforms,

2

and markets without prices, which is

complemented with vivid examples and historical anecdotes. By

reviewing auction theories, the authors throw light on how Vickrey's

auction,

3

despite its limitations, proved useful for online bidding. They

discuss the economics of platform markets that has helped Uber,

Airbnb, Expedia, and many intermediaries run businesses and the

power of markets in facilitating exchange of kidneys. In fact, they

consider technology to be only a driving force and place markets on

a higher pedestal to be the next economic revolution.

1

The lemons theory was put forward by George Akerlof in 1970 in the paper

“The Market for Lemons: Quality Uncertainty and the Market Mechanism.”It

states that in the presence of asymmetric information between buyers and

sellers, the existence of low‐quality goods (lemons) in the market drives out

the good‐quality ones (cherries).

2

Platforms serve as a ground where sellers and buyers interact with each other

via a market maker. For example, credit cards, facebook, and iphone have

brought together visa cardholders and retailers, facebook advertisers, and iOS

app designers, respectively.

3

Vickery's auction involves the highest bidder paying the price quoted by the

second highest bidder as opposed to the first‐price auction where bidders sub-

mit their bids simultaneously and the highest bidder wins but pays the amount

he had bid.

DOI: 10.1002/pa.1694

J Public Affairs. 2018;18:e1694.

https://doi.org/10.1002/pa.1694

Copyright © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of2