The dollars and economic sense of Cupid agencies

The dollars and economic sense of Cupid agencies
Parents playing Cupid for their children at a matchmaking session in Hong Lim Park. The process involves the parents going through photographs and exchanging details such as age, educational status and current job. Contact numbers are then exchanged should the parents find the candidates suitable or desirable.

With a population density of over 7,000 inhabitants per square kilometre, Singapore is one of those places where it is much more difficult to avoid people than it is to meet them. However, the lonely hearts out there are not looking for just anybody: they are looking for a match. A match is someone with a set of characteristics that makes him or her a suitable partner.

Dating markets, like labour markets, are matching markets where there are two sets of elements (e.g. employers, and workers), and each element has a set of preferences. The market is in equilibrium when each element of one set is matched with an element of the other set.

This equilibrium is described as stable if each worker is matched with an employer in such a way that there does not exist any alternative matching that would make either the employer and the worker individually better off. Dating markets are different from labour markets, of course, in that it is unclear who is the buyer, and who is the seller, but the principle is basically the same.

American economists Lloyd Shapley and Alvin Roth won the 2012 Nobel Prize for Economics for independently developing a set of algorithms for stable matching. Professor Shapley also showed that those who have more power get a better outcome. People resort to matchmaking services to get a better outcome than they would get on their own.

Two key economic concepts are particularly useful in explaining why.

First, it is a costly activity to scout for potential matches. In economics, the cost goes beyond the bar tab and taxi fare, to include the value of the best alternative forgone. Economists call this the "opportunity cost" of a choice. For example, young professionals often face the choice of whether to work long hours to further their careers, or have a social life.

The cost of choosing the latter option is forgone income, both present and future (from potential career advancement). To some people, the opportunity cost of one hour of leisure is higher than the opportunity cost of one extra hour of work. These people will find it convenient to outsource the search for their life partner.

That does not mean that matchmaking services are only beneficial to individuals with fast-paced careers. Everyone experiences "asymmetric information". The man has all the information about himself (that his potential partner needs), and little or no information about where and who is his ideal woman. Conversely, the woman has all the information about herself (that her potential partner needs), but no information about where and who is her ideal man.

Asymmetric information can lead to an unsatisfactory outcome or, in extreme cases, to no transaction at all. A single person who has just recently moved to Singapore is at a disadvantage compared to a single who is a long-time resident because he or she does not know the best places to meet potential partners. But even long-time residents can have this problem.

Individuals looking for a companion, for example, can get the impression that there are no single people out there, or that there is no one for them, just because their job or lifestyle somehow creates a bias in the kind of people they tend to make contact with. This is a type of asymmetric information that economists call "adverse selection". The consequence is, once again, that the individual might settle for an imperfect match, or just not settle at all.

Economists refer to it as "market failure" because the free market fails to achieve the socially optimal allocation of resources.

The Digital Age has brought unprecedented ease of access to information. It is now possible to scroll through thousands of online profiles from anywhere to find those that match our preferences. However, the Internet has not eliminated asymmetric information in the dating industry. Rather, it has changed it from a problem of quantity of information into a problem of quality.

When meeting people online, through networking sites or classifieds, the concern is that they may reveal false or biased information about themselves, or have questionable intentions. A reputable dating service provides a safe environment within which to interact with potential matches.

But matchmaking services are not just useful to individuals. They are also socially desirable. Asymmetric information in dating markets leads to market failures, that is, fewer and/or lower-quality matches than is optimal. By facilitating the meeting of supply and demand, matchmakers eliminate informational asymmetries and correct the market failure. That makes the whole society better off by creating more matches, and higher satisfaction among matched pairs.

This article was first published on August 30, 2014.
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