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.

Links of Interest: 29th September

1. President Barack Obama chose Austan Goolsbee to succeed Christina Romer as the head of the U.S. Council of Economic Advisers. Here, the Wall Street Journal do a profile of Goolsbee.

2. The Guardian: a "nudge unit" set up by David Cameron in the Cabinet Office is working on how to use behavioural economics and market signals to persuade citizens to behave in a more socially integrated way.

3. The Daily Telegraph on Rory Sutherland's quiet behavioural economics revolution in the advertising industry.

4. Greatest Good: "a unique firm formed with the goal of applying rigorous, cutting-edge data analysis and economic methods to the most salient problems of business and philanthropy." Founding partners include Steven Levitt, Gary Becker, Daniel Kahneman and John List. Affiliates include David Laibson, Emily Oster, Steven Pinker and Richard Thaler.

5. The U.S. National Commission on Fiscal Responsibility and Reform. They have a separate mandate to the Congressional Budget Office. "The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."

6. A fascinating read for any Ph.D. student in Economics, or Ph.D. economist: 'Market Structure in the Production of Economics Ph.D.s'. Frank A. Scott, Jr. and Jeffrey D. Anstine; Southern Economic Journal Vol. 64, No. 1 (Jul., 1997), pp. 307-320.

7. The (Irish) Department of Education and Skills Inventory of Data Sources: "This document contains a matrix of educational data sources which are available from the Department of Education and Science and the agencies under its aegis."

8. University Attendance Scanners: "Northern Arizona University has installed electronic devices that record student attendance in an effort to boost freshmen grades and lift lagging graduation rates. But some students say the monitoring makes them feel less independent." (Southern California Public Radio).

9. "The Production and Deployment of an On-line Video Learning Bank in a Skills Training Environment" - Gerald Cannon, Mary Kelly, Colette Lyng, Mary McGrath; AISHE-J: The All Ireland Journal of Teaching and Learning in Higher Education, Vol 1, No 1 (2009).

10. For economics undergraduates: the Irish Taxation Institute Fantasy Budget Competition. Who needs fantasy football?

Today's Links: Behavioural Economists in "Treasury" and "Agencies"

1. Department of Finance Capacity Review July 2009: A number of areas where further skills developments were seen to be needed:
• Policy analysis
• Evaluation skills
• More economists, particularly skills in behavioural economics
• More expertise in regulatory impact analysis

2. Businessandleadership.com: The UK’s Institute of Practitioners in Advertising (IPA) has launched a Behavioural Economics Think Tank (BETT) to "advance understanding around disparities between what consumers say they’ll do when making choices about brands and what they actually do". The think tank is being led by IPA president Rory Sutherland, who is focusing on behavioural economics during his presidential term as he believes it can transform marketing effectiveness.

3. Brief biographies: of the members of the IPA's Behavioural Economics Think Tank.

4. The Institute of Advertising Practitioners of Ireland hosted a talk by Rory Sutherland earlier toay in the National Gallery of Ireland.

5. "Why Agencies Should Adopt Behavioural Economics to Achieve Success" - Rory Sutherland talks on the 4th June in Belfast.

6. TED.com: A profile of Rory Sutherland (Vice-Chairman of Oglivy), and a link to his TED-talk: "Life lessons from an ad man". Here's a link to Rory's blog.

7. The Irish Marketing Society has organised a seminar on behavioural economics to take place on the 18th May. Details here.

8. Karl Deeter: Behavioral Economics & Arrears - avoid repossession by reward.

9. TED talk by Sebastian Wernicke: How to create a guaranteed killer TED talk with the aid of statistical analysis. HT: Garr's posterous.

Rack off tobacco companies

Australians will ban all colour and branding from cigarette packaging and replace it with pictures of gangrened feet, amongst other things!

Here, we just recently put our swanky cigarette boxes out of view and without much fuss but the Australian plan is generating a lot of opposition, most of which is coming from obvious vested interests.

Tobacco companies' are proven masters when it comes to the dark art of persuasion and have always managed to wriggle their way around advertising restriction policies as they met them; the advertising of Dunhill "aftershave" is a clear example of their smooth cross-product branding acrobatics. This new government policy, which bans the use of colour, brand, and identity, is the ultimate way of curbing their influence. To my mind, blank packaging is defensible and seems fair. In addition the government could provide clear information on the risks associated with smoking to help inform consumers. This would be useful and honest, unlike what is being planned here.

Do the Australian government really know the probability of developing trenchfoot from smoking? Assuming they do, then they must know its not very high (given the few limbless smokers you see or hear about). So what we're dealing with here is actually a message that is inherently disingenuous. That's not good... nor is spreading such a message, with the intension of manipulating behaviour, in a realm that works by bypassing reason! are we really ok with this?

I'm pretty sure this is what used to call propaganda.

How Google Does Business...

1. "What could be more baffling than a capitalist corporation that gives away its best services, doesn't set the prices for the ads that support it, and turns away customers because their ads don't measure up to its complex formulas?". Read how economics underlies every aspect of the Google business model: here in Wired.

2. AdWords is a pioneering variation on a second-price auction.

3. AdWords was such a hit that Google used auctions to place ads on other websites: AdSense.

4. Hal Varian, Chief Economist at Google, has been mentioned on the blog before: here and here.

5. "But the really gutsy move," Hal Varian says, "was using it in the IPO." In 2004, Google used a variation of a Dutch auction for its initial public offering.

6. The Google equivalent of the Consumer Price Index is called the Keyword Pricing Index. Here's a link about Fathom Online's version. Examples of very competitive keywords are 'flowers' and 'hotels'.

7. Quality Scores are important: a penalty is invoked when the ad quality is too low. In such cases, the company slaps a minimum bid on the advertiser.

8. Hal Varian says: "The people working for me are generally econometricians—sort of a cross between statisticians and economists". He's currently hiring a senior economist. The London office also has other opportunities.

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?

Could Advertising Be Part of the Recovery?

As I've noticed shorter and shorter ad breaks on TV and radio over the last month, I've been wondering if lower advertising revenues are having an effect on jobs in the media sector. In some sense I'm glad to have less interruptions during my media consumption, but media, multimedia, graphic design and advertising are popular career choices in Ireland, and it doesn't appeal to think of employment opportunities in this sector of the economy drying up.

Before Christmas, a story emerged that cuts might be made at Irish televisions stations due to lower advertising revenues. After Christmas we heard that Irish advertising spend was down 30 per cent at end of 2008, and is predicted to fall further in 2009. On the other side of the Atlantic, a pay freeze was announced yesterday at Yahoo.

The question arises - could more jobs in media, multimedia, graphic design and advertising be saved if advertising revenues didn't fall so much? Also, is there a commercial imperative for companies (who are in it for the long haul) to keep advertising during the recession (and thereby stimulate employment in some parts of the economy)?

In other words, could advertising be part of the recovery? We mentioned recently that the Economist journal review points to an interesting article from Knowledge@Wharton: "When the going gets tough, the tough don't skimp on their ad budgets". According to the article:

"Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise."

It may not be as simple as simply pouring money into advertising campaigns though. First of all, if cash is scarce, how can campaigns be financed? Maybe a special bond could be set up by IBEC and/or ISME and issued to the Irish public?

Second, while there is evidence that advertising during a recession is beneficial, the extent (or even the existence) of the benefit may depend on the nature of business being conducted. Some very brief google-searching on the topic brings up the Ad Contrarian Blog (run by the CEO of an ad agency). This post on advertsting during a recession, suggests that there are three types of businesses (in relation to advertising), as follows:

* Businesses for whom advertising is essential.
* Businesses for whom advertising is discretionary.
* Businesses that are somewhere in the middle.

According to the post, businesses for whom advertising is essential tend to be in categories that are consumer-oriented and highly responsive to marketing activity. They include fast food, retail, consumer packaged goods, and automotive. This suggests that Irish companies involved in these types of activities should ensure that they do not cut back on advertising during the recession.

Also, according to this post on the same blog, it is better to focus on changing behavior rather then attitudes. Apparently, it is easier to convince someone to eat a Big Mac than to convince them that a Big Mac is a good thing to eat. Also, it is easier to convince someone to go to Las Vegas than to convince them that going to Las Vegas is a smart thing to do.

The question remains though, how can companies test that particular advertising approaches during a recession will be (more or less) successful? We mentioned before (here) that Google has rolled out a tool designed to show how people browsing the web respond to online advertising (Adplanner - see here).

"By comparing the behaviour of people who are exposed to particular adverts with those who are not, the company hopes to give advertisers feedback about which campaigns are are successful." This may be one of the first instances where advertising has been evaluated in the spirit of randomised controlled trials.