Notes on Lecture about Economists' Influence on the Internet Economy

Introduction

• The lecture starts with a humorous anecdote about two guys walking into a bar.
• This anecdote introduces the concept of artificial scarcity.

Artificial Scarcity in Online Dating

• Scenario at Cupid.com:
  • A man (the anti-hero) approaches women at a bar and is consistently turned down.
  • He tries the same approach online at Cupid.com, but the women receive too many offers, leading to dissatisfaction and quitting.
• Economists to the Rescue:
  • Economists Muriel Niederle (Stanford) and Dan Ariely (Duke) suggest limiting the number of date offers men can make.
  • This creates artificial scarcity, making men take offers seriously and women more likely to accept.
  • Result: Saves Cupid.com and enhances user experience in online dating, contributing to the industry's growth into a $2 billion market in North America.

Economic Principles in Online Businesses

Priceline's Conditional Price Offer

• Key Idea: Priceline's success is not just about "Name-Your-Price" travel, but rather the conditional price offer.
  • Users are bound to pay the price if their bid is accepted, making them take bids seriously.
• Inventor of the Idea: Jay Walker, influenced by his economics education, created this system, revolutionizing the travel industry.

Google’s Auction Model

• Initial Challenge: Google started by manually advertising, which was inefficient as demand grew.
• Solution: Auction system designed by engineers Eric Veach and Salar Kamangar to automate ad placement.
  • Introduced the second-price auction, where the winning bid is the second highest plus one penny.
  • Addresses the winner’s curse problem, where winners regret overpaying.
• Influence of Economists: Hal Varian, a leading economist, confirmed the validity of the auction model, leading him to join Google as the first chief economist.

Deregulation and Transportation

• Background: In the 1980s, airline and trucking industries were heavily regulated, stifling competition.
• Economic Advocacy: Economists like Michael Levine, Alfred Kahn, and Darius Gaskins argued for deregulation.
• Outcome: Deregulation in 1978 and 1980 fostered competition between UPS and FedEx, enabling efficient delivery systems crucial for internet retailing.
  • Enabled Amazon to thrive by leveraging these transportation systems.

Impact of Economics on Sports

• Moneyball Example:
  • Billy Beane, general manager of the Oakland A's, utilized sabermetrics (developed by Bill James) to build a competitive team on a budget.
  • Sabermetrics applies economic principles to baseball and is now used across various sports.

Conclusion

• Economists have played a fundamental role in shaping the internet economy, impacting online dating, travel, advertising, and even sports.
• The lecture emphasizes the need to recognize and respect economists for their contributions to modern industries.