Covering Disruptive Technology Powering Business in The Digital Age

For eight years, Peter Coles had an economist’s dream job at Harvard Business School.

His research focused on the design of efficient markets, an important and growing field that has influenced such things as Treasury bill auctions and decisions on who receives organ transplants. He even got to work with Alvin Roth, who won a Nobel in economic science in 2012.

But prestige was not enough to keep Coles at Harvard. In 2013, he moved to the Bay Area. He now works at Airbnb, the online lodging marketplace, one of a number of tech companies luring economists with the promise of big sets of data and big salaries.

Silicon Valley is turning to the dismal science in its never-ending quest to squeeze more money out of old markets and build new ones. In turn, the economists say they are eager to explore the digital world for fresh insights into timeless economic questions of pricing, incentives and behavior.

“It’s an absolute candy store for economists,” Coles said.

The pay, of course, is a lot better than you would find in academia, where economists typically earn $125,000 to $150,000 a year. In tech companies, pay for an economist with a doctorate will usually come in at more than $200,000 a year, the companies say. With bonuses and stock grants, compensation can easily double in a few years. Senior economists who manage teams can make even more.

Businesses have been hiring economists for years. Usually, they are asked to study macroeconomic trends — topics like recessions and currency exchange rates — and help their employers deal with them.

But what the tech economists are doing is different: Instead of thinking about national or global trends, they study the data trails of consumer behavior to help digital companies make smart decisions that strengthen their online marketplaces in areas like advertising, movies, music, travel and lodging.

Tech firms including Amazon, Facebook, Google and Microsoft, and up-and-comers like Airbnb and Uber, hope that the improved efficiency will translate into more profit.

At Netflix, Randall Lewis, an economic research scientist, is finely measuring the effectiveness of advertising. His work also gets at the correlation-or-causation conundrum in economic behavior: What actions occur coincidentally after people see ads, and what actions are most likely caused by the ads?

At Airbnb, Coles is researching the marketplace of hosts and guests for insights, both to help build the business and to understand behavior. One study focuses on procrastination — a subject of great interest to behavioral economists — by looking at bookings. Are they last-minute? Made weeks or months in advance? Do booking habits change by age, gender or country of origin?

“They are microeconomic experts, heavy on data and computing tools like machine learning and writing algorithms,” said Tom Beers, executive director of the National Association for Business Economics.

Understanding how digital markets work is getting a lot of attention now, said Hal Varian , Google’s chief economist. But, he said, “I thought it was fascinating years ago.”

Varian, 69, is the godfather of the tech industry’s in-house economists. Once a well-known professor at UC Berkeley, Varian showed up at Google in 2002, part time at first, but soon became an employee. He helped refine the AdWords marketplace, where advertisers bid to have their ads shown on search pages, based on the words users type into Google’s search engine.

Google’s insight was to avoid giving the best ad placement to the highest bidder. Varian worked to develop a different model for ad placement, calculating the probability that a user will click on an ad and find the ad relevant. It was a classic example of smart market design.

Since then, Varian and his team have applied their economic perspective to Google’s ad markets, the company’s unusual auction for its initial public offering, bidding strategies for wireless spectrum, patent auctions and purchases, and models for new businesses like driverless cars.

For the moment, Amazon seems to be the most aggressive recruiter of economists. It even has an Amazon Economists website for soliciting resumes. In a video on the site, Patrick Bajari, the company’s chief economist, says the economics team has contributed to decisions that have had multibillion-dollar impacts for the company.

Another Amazon jobs site lists openings for economists. As of Friday, there were 34.

Seeing this emerging job market, the National Association for Business Economics held its first meeting for technology company economists in April in San Francisco. Another is set for October in Silicon Valley.

Academia is also starting to take notice — and adapt. “It’s all happening so fast, it’s hard to keep up,” said Susan Athey , an expert in the economics of technology at the Stanford Graduate School of Business who is also a consultant to Microsoft.

Many economics students also take computer science courses, and some major in both. But a new course this fall at Yale, called Designing the Digital Economy, seeks to blend economics and computer science in the way digital economists do at tech companies. The instructor is Glen Weyl, an economist at Microsoft Research, and the course will have guest lecturers from Amazon, Pandora and Uber.

The course is a pilot project for curriculum change and perhaps a joint degree program focused on digital markets and their design. Dirk Bergemann, chairman of the Yale economics department, explained that economics is concerned with efficiency, prices and incentives, while computer science focused on algorithms and complexity.

“In digital marketplaces, you are trying to address both sets of problems,” he said.

Weyl predicts that the rise of digital marketplaces in the economy is just getting underway. Uber in ride-hailing and Airbnb in room-renting, he said, may well be just the start of a redefinition of private property, made possible by digital technology.

Things, according to Weyl, will increasingly be rented as services instead of owned. That is the long-term vision of driverless cars: When a vehicle just shows up on command, far fewer cars will sit in driveways. Transportation efficiency, resource consumption and industries will all be transformed, he said.

The same could be true for household goods, Weyl said. One possible situation: After you use your espresso machine for breakfast, a drone comes to pick it up, and you rent it out for the day.

A current market-design challenge for Amazon and Microsoft is their big cloud computing services. These digital services, for example, face a peak-load problem, much as electric utilities do.

How do you sell service at times when there is a risk some customers may be bumped off? Run an auction for what customers are willing to pay for interruptible service? Or offer set discounts for different levels of risk? Both Amazon and Microsoft are working on that now.

“Economics influences rather than determines decisions,” said Preston McAfee, Microsoft’s chief economist, who previously worked at Google and Yahoo.

This article was originally published on www.sfgate.com can be viewed in full

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