By: John Brake
In a market where lives hang in the balance, we can uncover so much about the fundamentals of a market, and maybe learn from it too.
Economic discussions are dominated by markets, but what is a market? A reader of the Wall Street Journal’s Markets section could refer to articles about the US stock market rally, the fall in treasury yields, or the factors underpinning the recent dollar comeback. Another person could discuss the market for crude oil in the US, the market for iPhones in India, or the market for butter in France. Or, more simply, one could think about the bodega they get their lunch from, and how the manager has raised the price of coconut water by 50 cents for the second straight week. In these examples one can see that, to many, markets mean money⎯the price of goods, currency fluctuations, or prices of equities on the stock market. In other words, when we think about markets, we are usually thinking of commodity and financial markets.
Price is a dominant feature of many markets. Take for instance my local bodega⎯I walk in, decide what I want, whether I can afford the obscenely overpriced coconut water, and I buy it. The bodega owner obviously does not care about me, nor do I care about him⎯the price of the coconut water does all the work in bringing us together, precisely where supply equals demand. In commodity markets, prices serve a similar role. When large quantities of coffee, or coffee derivative contracts, are traded the price of the coffee is the ultimate factor that brings parties together to transact. The transaction is not contingent on the coffee farmers knowing the identities of the parties purchasing the raw coffee or trading coffee futures on the New York Mercantile Exchange, and vice versa. Similarly with The New York Stock Exchange, when you purchase 500 shares of Amazon stock, you do not care about the identity of the seller, and the seller, in turn, does not require you to submit an application explaining how well you are going to take care of the Amazon stock once they are in your possession for the transaction to occur. The supply and the demand for the Amazon stock are contained in the price, both parties in the exchange remain anonymous, and those 500 shares of Amazon stock can continuously change ownership. Commodity and financial markets are by far the most publicized kind of market, and as such they dominate the discussion of markets and their meaning in our lives.
However, commodity and financial markets are not the whole story. In many very important markets, prices do not do all the work. These so-called “matching markets”, so named because the buyers and sellers must be “matched” together in order for the transaction to occur, are in the background of some of our most important life decisions. In such markets, the identities and characteristics of the participants in an exchange have weight in the transaction. A prime example of a matching market would be the market for university in the United States. NYU does not lower its tuition to attract the exact number of students it can accommodate, likewise a student’s desire to attend NYU and ability to pay tuition do not guarantee a spot at the university. In other words, the “transaction” between prospective students and NYU hinges on many non-financial, non-price factors. A prospective student’s interest in NYU is shaped by many non-price factors⎯the university’s world-class professors, or its location, or its amazing economics department. This interest is signaled to NYU in the form of a lengthy application, supplemental writing, and perhaps, the participation in an early admission program. NYU will only consider interested students, but NYU admissions counselors will only admit a particular kind of student. Prospective students must prove they fit this profile through the essays they write, the extracurricular activities they are involved in, and their performance on aptitude tests in order to be admitted to NYU. The ultimate “matching” of the prospective student with NYU is contingent on these non-price factors.
In the university matching market, non-price factors are the primary consideration, but tuition still exists in the background. However, there exist matching markets where price is not involved whatsoever.
Enter Kidney Exchange in the United States.
Kidney exchange is a fascinating matching market, in that, in the United States the kidney exchange market involves no money, and the non-financial factors of the parties participating in the exchange are the only factors that allow a transaction to take place.
First, let’s take a few steps back. Humans have two kidneys, and barring any extraneous medical condition, humans only need one to function. Kidney disease involves the gradual loss of kidney function, which without treatment is fatal. If you were looking to donate a kidney to a loved one suffering from kidney disease, you both would have to undergo many tests⎯blood type compatibility, a tissue typing antigen test, and two cross-match blood tests to see how the recipient will react to the donor’s kidney, among others. Due to these biological factors, even the ability or desire to give your kidney does not guarantee that the recipient will be able to take it⎯only certain donors and recipients can be matched together. This difficulty in matching donors with recipients partly accounts for the OPTN data as of October 30, 2017, showing 96,475 people on the waiting list for a life-saving kidney transplant. However, the difficulty in finding compatible pairs should not perturb kidney transplants from occurring. Kidney transplants are not only lifesaving, they are also the most cost-effective treatment. According to the 2017 Annual United States Renal Data System Report, the cost of kidney dialysis ranges from $75,140 – $88,750 price per patient per year, while the cost for a transplant is only $34,084. Therefore, it is of public and economic interest to ensure as many transplants occur as possible. Another glaring fact aspect of the kidney transplant market is the absence of money, one cannot go onto the open market and legally purchase a kidney. This is because, like in many other countries, the buying and selling of organs is illegal in the United States. According to the National Organ Transplant Act, “it shall be unlawful for any person to knowingly acquire, receive or otherwise transfer any human organ for valuable consideration for use in human transplantation.” This legal condition means that the only way for incompatible donor-recipient pairs to obtain a viable kidney is through a kidney exchange with another incompatible donor-recipient pair.
Kidney exchanges that involve incompatible donor-recipient pairs are called paired kidney exchanges. To illustrate this kind of exchange, imagine an incompatible donor-recipient pair, call them Pair A, and another incompatible donor-recipient pair, Pair B. In a paired kidney exchange, the donor in Pair A would give their kidney to Pair B’s recipient and Pair B’s donor would give a kidney to Pair A’s recipient. A key requirement of this kind of exchange is simultaneity. The exchange must be simultaneous because if either pair receives the kidney first, there is an incentive for the pair that received the kidney to renege on exchange. Such an incentive is very problematic for the market, for it means that the pair that gave a kidney, but did not receive one in return not only has a recipient still suffering from kidney disease, but now has no more kidneys to participate in a future exchange. This problem cannot be solved in court because, legally, a contract is a form of “valuable consideration” and thus no contracts can be written on kidneys. In other words, the cost of a broken exchange is very high. The simultaneity requirement also imposes a logistical constraint on the exchange. For each exchange there requires simultaneous operating rooms and teams to perform each nephrectomy (removal of the kidney) and each the transplant. With current technology, this means that only a three-way paired exchange (6 Operating Rooms) is possible (see below).
In this market, only three kidneys can be exchanged and transplanted, meaning at maximum only three people can be saved⎯there has to be a better way.
Turns out, there is a better way, and we can thank Alvin Roth for discovering it. A trained game theorist and now Nobel prize winner, helped design a clearing house for kidneys exchange with chains of non-simultaneous exchanges that hinge on non-directed donors. In a 2009 paper published in the New England Journal of Medicine, Roth and his colleagues outline how the non-directed donor chain works. A non-directed donor is a donor unpaired to a recipient. In other words, a non-directed donor is an altruistic donor who gives their kidney into the ether, not caring whom the kidney is donating to, or expecting a kidney in return. Such a donor profoundly restructures the Kidney exchange market. Most importantly, it relaxes the simultaneity requirement, without any of the broken exchange costs observed in the paired-exchange market. The reason why the simultaneity requirement can be relaxed is best illustrated through an example. Imagine Pair A and Pair B from before, and then add a non-directed donor, Donor C. Donor C plans to give their kidney to Pair A who then will give a kidney to Pair B. On the day of the exchange, say Donor C altruistically gives Pair A their kidney, but Pair A does not give a kidney to Pair B. In analyzing the outcome, Donor C is is indifferent, Pair A is made better off and Pair B, though disappointed, but still has a kidney to participate in future exchanges. In other words, Pair B is no better and no worse off as before the exchange, there are no costs to breaking a chain, and thus simultaneity is no longer a requirement. In the absence of simultaneity, it means that operation rooms can be reused over time making exchanges with more people possible. In the aforementioned paper, Roth and his colleagues discuss a 10-person kidney exchange chain that was made possible this so called “nonsimultaneous, extended, altruistic-donor”(NEAD) chain and prophetically end the paper with “although many challenges remain in maximizing the benefits that can be achieved with paired donation, we believe that this report of a chain of paired kidney donations in which the transplantations were not necessarily performed simultaneously illustrates the potential of this approach.” Potential it had, in 2011 the National Kidney Registry armed with compatibility data on donors and potential recipients across the country, began a NEAD chain of 60 people⎯30 kidney donors and 30 people with a new kidney! The difference between the NEAD chain market’s outcome compared with that of the pair-exchange market could not be more dramatic⎯more matches, more lives saved without prices or money.
Lessons from Kidney Exchange:
The NEAD chain kidney exchange market is important for a number of reasons. Not only does it highlight humanity’s altruism and its potential to create real positive change in people’s lives, it also highlights the power of market design. The market demonstrates how a reorganization of the conditions and incentives in a market can profoundly alter the outcome. The NEAD chain kidney exchange market also highlights the power and diversity of markets. Markets are not just for purchasing overpriced coconut water or Amazon stocks, they are for all the efficient allocation of all kinds of scarce resources. Kidney exchange is a market, just as college is a market, just as marriage is a market. Individuals, especially economists, should not be pigeonholed into the over-publicized commodity and financial markets. Markets exist all around us and in exploring different kinds of markets and how they allocate resources, we make the markets we design and participate in more efficient⎯perhaps saving some lives along the way.
Prohibition of organ purchases, 42 U.S. Code § 274e (1984)
Transplantation Department of Abbott Northwestern Hospital. (2009, May 15). Tests you need before surgery. Retrieved November 06, 2017, from https://www.allinahealth.org/health-conditions-and-treatments/health-library/patient-education/kidney-transplant/for-the-kidney-donor/tests-you-need-before-surgery/
42 U.S. Code § 274e – Prohibition of organ purchases. (n.d.). Retrieved October 31, 2017, from https://www.law.cornell.edu/uscode/text/42/274e
Rees, M. A., Kopke, J. E., Pelletier, R. P., Segev, D. L., Rutter, M. E., Fabrega, A. J., . . . Montgomery, R. A. (2009). A Nonsimultaneous, Extended, Altruistic-Donor Chain. New England Journal of Medicine, 360(11), 1096-1101. doi:10.1056/nejmoa0803645
United States Renal Data System. 2017 USRDS annual data report: Epidemiology of kidney disease in the United States. National Institutes of Health, National Institute of Diabetes and Digestive and Kidney Diseases, Bethesda, MD, 2017.
Roth, A. E. (2016). Who gets what–and why: the new economics of matchmaking and market design. Boston: Mariner Books/Houghton Mifflin Harcourt.
Sack, K. (2012, February 18). Lives Forever Linked Through Kidney Transplant Chain 124. Retrieved October 31, 2017, from http://www.nytimes.com/2012/02/19/health/lives-forever-linked-through-kidney-transplant-chain-124.html
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3-Way Kidney Exchange [Chart]. (n.d.). In John Hopkin’s Medicine. Retrieved October 31, 2017, from https://www.hopkinsmedicine.org/transplant/programs/kidney/incompatible/paired_kidney_exchange.html
Sharp, C. (n.d.). [Digital image]. Retrieved October 31, 2017, from http://bcm.bc.edu/issues/fall_2006/inquiring_minds/fair-trade.html