A Supply and Demand Framework for Two-Sided Matching Markets

This paper develops a price-theoretic framework for matching markets with heterogeneous preferences. The model departs from the standard Gale and Shapley (1962) model by assuming that a finite number of agents on one side (colleges or firms) are matched to a continuum mass of agents on the other side (students or workers). We show that stable matchings correspond to solutions of supply and demand equations, with the selectivity of each college playing a role similar to prices.We apply the model to an analysis of how competition induced by school choice gives schools incentives to invest in different aspects of quality. As another application, we characterize the asymptotics of school choice mechanisms