When to Use Markets,Lines,and Lotteries: How Beliefs About Preferences Shape Beliefs About Allocation

Abstract

When allocating scarce goods and services, firms often either prioritize those willing to spend the most resources (e.g., money, in the case of markets; time, in the case of lines) or simply ignore such differences and allocate randomly (e.g., through lotteries). When do these resource-based allocation rules seem most appropriate, and why? Here, the authors propose that people are more likely to endorse markets and lines when these systems increase the likelihood that scarce goods and services go to those who have the strongest preferences—that is, when they help sort preferences. This is most feasible when preferences are dissimilar (i.e., some consumers want something much more than others). Consequently, people are naturally attuned to preference variance: when preferences for something are similar, markets and lines seem less appropriate, because it is unlikely that the highest bidders or those who have waited the longest actually have the strongest preferences. However, when preferences are dissimilar, markets and lines seem more appropriate, because they can more easily sort preferences. Consumers thus react negatively when firms use resource-based allocation rules in situations where preferences cannot be easily sorted (e.g., when preferences are similar).