In the last three decennia, many governments have introduced market mechanisms in education. They have done so by enhancing parental choice and encouraging school competition, through policies like abolishing catchment areas, creating voucher programmes and setting up charter schools. These market mechanisms have given rise to fierce debates in both political and scientific circles. However, most prior reviews of research literature in this area have concluded that the effects of market mechanisms in education are small, if they are found at all. This review tries to answer the question why that is the case, by analysing the causal pathways that link market mechanisms to educational outcomes and by reviewing the empirical evidence for each step along those causal pathways. The findings of this review point to the need for a nuanced and qualified discussion about market mechanisms in education. What market mechanisms mean in actual practice strongly depends on (local) contexts, while the impact of market mechanisms is related to other policies impacting on parental choice behaviour as well as actions taken by schools.