Economics at Yahoo!

I've blogged before about Hal Varian, Chief Economist at Google, and how his role in the organisation has been central to Google's business model. I have also mentioned pioneering work at Yahoo! Research on the effectiveness of online advertising, the battle between Google, Yahoo! and Bing in the economics of internet search, and the statement by Yahoo! Research that they routinely compete for talent with the top ten economics departments in the world.

However, it has only now come to my attention that Varian has a counterpart at Yahoo! The economist in question is Preston McAfee, on leave from the position of J. Stanley Johnson Professor of Business, Economics, and Management at the California Institute of Technology. At Yahoo!, Professor McAfee is Vice President and Research Fellow at Yahoo! Research in Burbank, CA, where he leads a group focused on microeconomics research. Here is a list of recent publications from the Microeconomics and Social Systems cluster at Yahoo!

Professor McAfee wrote Introduction to Economic Analysis, a free, open-source text that spans both principles and intermediate microeconomics. In 1994, the FCC in the USA auctioned access to a number of radio frequencies for new communications services, using an auction designed by Paul Milgrom, Robert B. Wilson, and Professor McAfee, and raised over $17 billion. This auction design was copied around the world. McAfee, Milgrom, Wilson and John McMillan (1951-2007) formed a company, Market Design, Inc., that advises governments on how to maximize the return from sales of radio frequencies, mineral rights, airports, and other assets.

Returning to Yahoo!, The Register magazine describe the company's Right Media exchange — a display advertising marketplace that matches advertisers with publishers and ad networks — as (by one measure) the largest exchange in the world, running over nine billion auctions each day. Finally, the Yahoo! Advertising Blog is also an interesting read; the current post - Mad Men No More - features a discussion by "advertising’s new guard" on how they are re-defining the industry.

A Few More Links

1. Do happy people have fewer heart attacks?

2. Obama advisor Austan Goolsbee on the importance of "the first job after graduation": NYT 2006

3. This week's U.S. jobs measure: payroll tax exemption, and tax breaks for capital expenditure

4. CIRGE: the Center for Innovation and Research in Graduate Education

5. Panel Conditioning and Attrition in the AP-Yahoo! News Election Panel Study

6. Tomorrow's edition of The Economist runs with the following lead-story: "The Data Deluge - and How To Handle It"

7. Job Opportunities at Yahoo!: the tech giant recently advertised for Ph.D. graduates in Microeconomics

Advertising Works - According to Yahoo! Research

We have discussed the possibility of evaluating adevertising campaigns on this blog before (here and here). So it is interesting to read that Yahoo! Research is measuring the effects of advertising on sales through a controlled experiment (more details available here). Researcher David Reiley has recently collaborated with Yahoo!’s Marketing Insights team in their ongoing efforts to help advertisers evaluate the effectiveness of their advertising campaigns.

Reiley joined Yahoo! Research because of his longstanding interest in field experiments and he points out a potential weakness of a study reported in a recent Harvard Business Review article, which measured large increases in sales due to online advertising. The study used large quantities of data from comScore, a key online information provider that logs the Internet browsing behaviour of two million users worldwide. By comparing the purchases of those who saw a given online ad with the purchases of those who do did not see it, the study concluded that there are large positive effects of online advertising.

However, "the population of people who sees a particular ad may be very different from the population who does not see the same ad,” says Reiley. Reiley's research made use of a database match between Yahoo! and a nationwide retailer by identifying users who registered the same email address with both companies. After finding over one million matched users, the researchers randomly assigned them to treatment and control groups for one of the retailer’s online advertising campaigns.

The project then tracked sales each week at the retailer, both online and in stores. In a paper co-authored with summer intern and MIT PhD student Randall Lewis, Reiley found that the online display advertising increased total revenues by approximately 5% for those users exposed to the ads, with 93% of the total effect happening in offline sales. They also observed online ads to have a large impact on sales even when the ads are not clicked: 78% of the increase in sales came from those who viewed, but did not click, the ads.

Could this have implications for the "pay-per-click" model in online advertising?