Companies ranging from Google, Facebook, and Microsoft to Airbnb and Uber now all have large teams of PhD economists. First, the field of economics has spent decades developing a toolkit aimed at investigating empirical relationships, focusing on techniques to help understand which correlations speak to a causal relationship and which do not. Second, economists have spent decades thinking about the design of markets and incentives, and this work – which also predated the internet age – has found new applications in the digital economy. In particular, there are five areas where economists can help tech companies.
Over a recent coffee discussion, the COO of a multi billion-dollar tech company told us he was interested in building out an internal team of economists. He had collaborated with economists, and was excited about the results. He now wanted to know how to bring the economist’s toolkit into more parts of the business. If he were to hire a team of PhD economists, how should he begin?
We’ve had many conversations like this, as economists have begun to play a growing role in the tech sector, and as companies have sought guidance on how to bring economists into their companies. For example, Amazon has quietly hired more than 150 PhD economists. New hires have ranged from a chief economist (who was previously a tenured economics professor) to newly minted PhDs, who are assigned to work on specific business problems throughout the company. Specific projects cover everything from design choices around Amazon reviews to estimating demand for products on Amazon.
Amazon is far from alone in its aggressive hiring of PhD economists. Companies ranging from Google, Facebook, and Microsoft — where one of us, Susan, was previously the consulting chief economist — to Airbnb and Uber now all have large teams of PhD economists. And dozens of other tech companies have hired smaller groups of economists.
We’ve spent much of our careers researching issues related to the tech sector, and more recently helping to build a community of tech economists — both in academia and in practice. And, motivated by this, we recently wrote a paper in the Journal of Economic Perspectives, exploring the work that economists are doing in the tech sector, and the ways in which the economics toolkit are a natural fit for tech companies.
In the article, we highlight two central components of the economics PhD training that existed well before the rise of tech firms, but turn out to be well suited to this sector.
First, the field of economics has spent decades developing a toolkit aimed at investigating empirical relationships, focusing on techniques to help understand which correlations speak to a causal relationship and which do not. This comes up all the time — does Uber Express Pool grow the full Uber user base, or simply draw in users from other Uber products? Should eBay advertise on Google, or does this simply syphon off people who would have come through organic search anyway? Are African-American Airbnb users rejected on the basis of their race? These are just a few of the countless questions that tech companies are grappling with, investing heavily in understanding the extent of a causal relationship. Economists were responsible for asking and answering all of these questions. Of course, causal inference is important in all sectors, but the tech sector — where data abounds and experimentation is feasible — has been a leader in trying to complement intuition with data. And these analyses have a big impact on the companies involved; for example, eBay’s advertising analysis found that they had been wasting millions of dollars by inefficiently advertising on Google.
Second, economists have spent decades thinking about the design of markets and incentives, and this work — which also predated the internet age — has found new applications in the digital economy. As online marketplaces — ranging from Uber and Airbnb to Tinder and Paktor to advertising actions — have become an important part of the digital economy, economists have played a central role in helping to shape them. For example, economics research has thought carefully about the role of consumer search in shaping the design of auctions for digital advertising. In her work with Microsoft, Susan used these ideas to help improve the quality of Bing’s advertisements. Bringing economic theory into the design of marketplaces can have a big impact on the bottom line. When Michael Ostrovsky and Michael Schwartz noticed that Yahoo!’s reserve prices were lower than theory would suggest is the most profitable, they ran an experiment to tweak the reserve prices — and helped to company increase profit by millions of dollars.
It’s exciting to watch the tech sector evolve, and to see the impact that the economics toolkit has had. Over the past two years, we have co-organized a conference on economics in the tech sector, sponsored by the National Association of Business Economists. This conference has highlighted the practical relevance of the work being done by tech economists, and the companies that are now bringing an economics mindset into their decisions making.
In our journal article, we further discuss the role economists are playing in the tech sector, and the types of projects they are currently working on. However, we have also found that companies are often unsure of how to get started in creating an economics team. In practice, the range of roles is large. But companies looking to create an economics team can start by asking the following questions. The answers will dictate where economists might create value in the company.
5 Questions Economists Can Help Tech Companies Answer
What are your goals around user growth, profitability, fairness, etc, and how is the design of your platform affecting them? If your platform involves matching users or businesses, then market design economists can likely help to guide these decisions. Examples of firms where matching is central include marketplaces (Airbnb, Tinder, etc) and review platforms (TripAdvisor, AngiesList). Some firms have started out as traditional retailers or vendors selling their own products, and then transitioned to become a platform. An initial question facing companies ranging from online retailers to financial services is whether to allow other firms to sell products or services to their consumers alongside their own, and whether to do so only for complementary products or to go so far as opening up to products that might directly compete with their own. Other relevant market design projects range from modifying the structure of pricing to designing a reviews platform. For example, in a series of papers, one of us (Mike) identified widespread racial discrimination on Airbnb, and proposed a series of market design solutions that would reduce the amount of discrimination on the platform, while allowing the platform to continuing growing. Airbnb ultimately incorporated many of these proposed changes, and created a full time internal team dedicated to understanding and reducing discrimination. As discussed above, work by Susan, Michael Ostrovsky, Michael Schwarz, and others has guided the design of advertising auctions and shaped the core design of these ecosystems.
Are scale economies important for your company or your suppliers or customers? If so, opportunities for mergers, acquisitions, and exclusive deals by your firm or your competitors are likely to occur and may alter the strategic environment. Economic principles can help you understand what industry structures are likely to be sustainable, as well as quantify how particular deals would affect the profitability of your business. Economic principles can aid in predicting the response of regulators to changes in industry structure. For example, economic modeling can help to understand whether a market can sustain multiple competitors (e.g. Android and iPhone), or is likely to end in a single dominant firm. For example, in many smaller countries, Google has more than 90% market share in search.
How is your company affecting the world? Can you understand the value you are creating, and effectively communicate it to stakeholders? Are there negative, unintended consequences that you can better anticipate and minimize? Are regulatory changes required for your company to succeed in the long term, or are you vulnerable to the introduction of new legislation that might impede your business? Industrial organization and labor economists can help to quantify the impact your platform is having on the broader economy.
Can economics improve your management practices and decision making? Economists study incentives, and tech companies have many fascinating and important incentive design problems — ranging from setting a wage structure for a sales team to determining which markets to enter. The set of outcome metrics used to evaluate A/B tests can also have a large impact on what innovations engineers choose to pursue. For example, there is often a tradeoff in terms of speed of measurement (favoring short-term metrics) against the use of metrics that capture a firm’s true objective (favoring metrics that may take weeks or months to be realized). This can have important implications. In the context of email marketing , optimizing for short-term outcomes such as whether a consumer opens an email solicitation may lead a firm to send emails that have eye-catching subject lines but don’t ultimately lead to purchases.
How are you thinking about your data assets? Data is a critical strategic asset for most technology firms, and there are many economic decisions involved, ranging from decisions about retaining and acquiring data, to products and partnerships that generate or create access to different types of data, to whether a firm should try to sell data in some form as an additional business line. Economic models can be used to value data, including its impact on competitive strategy.
Beyond questions of how data can be used to improve platform design, economists might also contribute to the question of how data can be used to shed light on the world. For example, tech data can inform policy and complement standard government data. Tech data can also be used to develop valuable analytics packages, or result in new products entirely. In other words, while it’s great to be product focused, online platforms are often a microcosm for society, offering a testing ground for broad societal questions. Getting involved in these discussions, when you think you have unique insights can be fulfilling, allow you to discover new facts, and to understand what unique perspective your company has. Using Yelp data to understand the minimum wage helps policymakers, while also helping Yelp to understand its own data and have a seat at the broader policy table — allowing it to do well by doing good. Many tech companies have similar slices of data that they can use to help understand and improve the world around them, and some, such as Google (Google Trends), Zillow, and others, have created free data sets that are available to researchers around the world, or open APIs that researchers may access for low cost.
For companies looking to create or scale a team of economists, these questions should give a sense of how the economics toolkit might fit into the broader set of problems the company is working on.
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