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.

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.