Economists in tech firms
Luca and co-author Susan Athey, the economics of technology professor at Stanford Graduate School of Business and a pioneering tech economist herself, delve into the phenomenon in their paper Economists (and Economics) in Tech Companies, forthcoming in the Journal of Economic Perspectives.
“Inside tech firms there’s a huge competition for talent right now,” Athey says. “There are fairly junior PhDs making in the high six figures or even seven figures because their expertise is just so valuable.”
What does a digitization/tech economist do every day? Problems they work on include:
Online advertising design. Advertising inventory on search engines is often sold via auction. Economists help companies design those auctions, advising on everything from the type of auction to run to where to set reserve prices. “Tech firms have also hired economists to solve challenges relating to the choice of outcome of advertising, such as pay-per-click versus alternatives,” the paper states.
The role of ranking and incentives in marketplaces. The way marketplaces and intermediaries rank offers from sellers or service-providers can be thought of as an incentive system. Economists are well positioned to analyze issues such as short-term user behavior and the equilibrium impact on the marketplace as a whole.
Estimating advertising returns. Digital advertising provides marketers with renewed opportunity to measure advertising effectiveness. Economists draw on both existing theories of advertising and the tools of econometrics to test and evaluate advertising effectiveness.
Designing review and reputation systems. Platforms like Yelp and TripAdvisor contain hundreds of millions of consumer reviews; online marketplaces also rely on reputation systems to facilitate trust between strangers. Economists help companies design reputation systems, “focusing on understanding the systematic biases that can occur in review ecosystems, and the design choices that might mitigate these biases,” according to the paper.
Acquisitions, exclusive deals, and strategy. Economists draw on economic theory and empirical methods to value exclusive deals in gaming platforms; analyze whether a market can sustain a new player; and how banks should consider potential partnerships with, say, Apple Wallet.
Price setting. At Uber, a team of economists work on how to design and fine-tune its surge pricing system, which changes fares in real time and increases prices during peak hours