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One of the things that's been really interesting about the tech companies of
the last 15 to 20 years is that, they've not only been innovating
in terms of their technology, but also in terms of their business models.
And actually,
most of the successful tech companies are some sort of platform company.
Their marketplaces like Amazon matching buyers and sellers of products or eBay.
They have advertising marketplaces like Google,
all of these are platform companies.
And so, not only do they have to do technical innovation, but
they also have to do business and economic innovation.
There's so many questions that come up in operating these businesses as well as in
thinking about their strategy, they just have not been addressed before.
You can't just call a consulting company and say like,
what's the best practice like I would for a factory?
If you're operating a marketplace like in Airbnb you have buyers,
consumers who want to rent and you have sellers who are the owners of the homes.
The marketplace has to really think about both sides of the market, on the sell side
of the market the homeowners have to keep their calendars current.
How annoying is it to try to book a vacation home, and
then have your reservation canceled because in a person's oops, sorry,
my calendar was wrong or wasn't available.
So it's really important that the suppliers in these marketplaces provide
a high quality service, keep their calendars current,
answer questions quickly, provide good customer service and good quality.
And they only do that if they have the incentives to do so, and
those incentives in turn are created by the marketplace.
So there's a real marketplace management challenge
that's new to these tech marketplaces.
And then the bigger platforms have strategic considerations that
are quite profound,
especially because a lot of these markets tend to be pretty concentrated.
When you have a platform market, more buyers, more sellers, more sellers,
more buyers, more users, more apps, more apps, more users.
You don't have a lot of opportunities to make mistakes and come back later,
Microsoft was a little bit late to the mobile phone market even though they
understood operating systems better than Google, they missed the boat.
And so they really have to get the strategy right and
understand all of the issues about industry structure.
So we've seen things like, you know, Google, they created a browser people like
Google, they're a search engine, how can they make a browser?
But if you understand the platform economics,
you understand why it was really important for Google to have a browser.
Because the browser chooses the default search engine, and if people are using
your browser then the default search engine will be your search engine,
and that can be a really important strategic advantage.
So faced with all those very non standard and quite challenging problems,
most of the leading tech firms Have brought in not just sort of macro
economists who do forecasting which is the traditional chief economist type of role.
But they brought in micro economist who think a lot more about these strategic
questions and also about marketplace management and and
pricing policies and things like that.
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The evolution of a new tech firm is that you have to start with an idea for
a product.
The next part is really engineering, you need to build the product,
you need to deliver the product, and
you need to incrementally make it better until you get to some sort of scale.
Once you get to the point that you then need to think about earning a profit and
becoming sustainable.
That's really when the economics comes in and
so a lot of times that's the stage where a firm will start try
to bring in these expertise, and of course you hire your business people.
But often these problems are so challenging and
non standard that just a generic business background may not be enough.
And so, that's also a moment where the tech economists can come in and
bring in sort of academic perspective on it to be able to design new
systems to design the reputation systems.
To design the pricing systems,
to design an auction model if an auction model is needed and so on.
And they will change the companies by teaching the engineers and
teaching the machine learning folks who might have built the basic algorithms.
How to map the business objectives onto their engineering,
even determining what are the goals,
what measures we using what KPIs should we be using in business lingo.
And it turns out that some measurements that sound intuitive turn out not to work
very well for operating a business.
They might be manipulable, they might not really represent long term success.
And so getting the right measures that really capture the organization's goals,
but still can be measured in a timely fashion,
is something that requires a lot of economics, and sort of business expertise.
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The tech firms really need economists who can think about strategic questions like
industry structure that requires understanding of sort of game theory and
industrial organization.
Turns out that some industry structures make sense and
some are really not sustainable.
And then there's more of the microeconomic marketplace management.
If you have a marketplace like a Airbnb or like a Yelp,
which is a review platform, you need to really think about the incentives
of all the people involved and you need to manage those incentives.
So there's the economic theory around what those incentives are and
designing incentives carefully for all the participants.
Then there's also the measurement, we need to know how strong those incentives have
to be, we need to measure what the big problems are.
And we design experiments that test the the impact of innovations.
And actually designing experiments in a marketplace is really quite difficult
because there's equilibrium effects.
If I can't just change things for 1% of the suppliers and
expect that to have the same effect as if I change it for all suppliers.
It's different if you and all of your competitors experience a change
versus if just a single supplier experiences that change by themselves,
their concerns about antitrust and competition policy.
There are concerns about privacy and security,
there are concerns about new service providers.
How do we think about regulating the Ubers and the Lifts and so
on, what are the rules that apply to these new business models?
And so, for all of those types of questions,
the economist role is to both conceptualize what the costs and
benefits of what's going on, and also again to bring data to bear.
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The relationship between academia and
business has really changed with the advent of tech firms.
Historically, there was a bit of a divide, you were an academic, or
you were part of the firm.
But because there's so many new problems coming up in tech firms that really
require sort of cutting edge research and original thinking.
Firms have started plucking a very different type of person into them
including putting a lot of emphasis on very top academics.
And so, how varian was the first example of this, the chief economist at Google,
Preston McAfee went to Yahoo and then I went to Microsoft.
At the time that I spent time at Microsoft,
I really got a lot of pushback from my colleagues.
There was a sense that well, I had gone to do this and I would never come back.
But I understood that a huge part of my value came from the types of
skills I was using in academics.
And so, I was honing my academic skills, I was improving them,
they taught me machine learning, they taught me AB testing.
The science was more advanced inside the firm than it was outside,
there was nothing like that happening in academics at the time.
Now, some people though have decided to stay in the tech firm careers.
And I think that one reason why academics are happy there,
is that their jobs are actually just really, really interesting.
They're doing the same quality of work, and the same rigor and challenge
that they would get in academics, except for the impact is immediate.
You're just really seeing the consequences of your decisions much more quickly.
You have control over the environment, you can build things.
At the beginning, it was pretty hard to bring in young people,
newly minted economists and have them be productive.
But as the group's have grown, there's now a career path and
we're seeing better and better young people deciding to come into these jobs.
And going to these tech firms, can give them the chance to do really rigorous
thinking and be really challenged intellectually, while changing products.
And also, living in a interdisciplinary environment,
where they can learn new skills from computer scientists and
engineers that they wouldn't of interacted with otherwise.
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I think that economists are going to be more attentive to all of the social
science aspects.
And by the way other social scientists are also contributing in tax firms as well,
the behavioral economics can really try to bring in the perspective of what
are the mistakes consumers might make.
And how can I design user interfaces or
experiences to help consumers make better decisions.
I also think that when you see in a marketplace say that,
a little symbol that says the seller responds within one hour to
email requests or even changes we've seen in the review systems.
Where instead of just asking you for five stars,
they ask you what was it that was good here?
And they're careful about not showing you the other person's review until
after you've put in your review.
A lot of that is about economics and incentives, and
trying to make sure that the systems and the rules are set up.
So that they provide the right incentives for
people to give honest information and not retaliate, and so on.
So I think the influence of the economists are present in a lot of
those types of examples.
Broadly than I think what the economists are bringing is sort of a way of thinking,
a way of thinking about measurement.
A way of thinking about the mapping of business objectives to metrics,
and especially a way of thinking about incentives.
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