Do Economists Make Markets? Hal Varian Does.

Wired has a feature about Hal Varian, a UC Berkeley professor and chief economist for Google. Varian joined Google in 2000 and determined that the AdWords auction system Google was planning was designed “perfectly.” Google then went ahead and launched the AdWords auctions to tremendous success. Since then, Google has gone auction-crazy, for example:

Google even uses auctions for internal operations, like allocating servers among its various business units. Since moving a product’s storage and computation to a new data center is disruptive, engineers often put it off. “I suggested we run an auction similar to what the airlines do when they oversell a flight. They keep offering bigger vouchers until enough customers give up their seats,” Varian says. “In our case, we offer more machines in exchange for moving to new servers. One group might do it for 50 new ones, another for 100, and another won’t move unless we give them 300. So we give them to the lowest bidder—they get their extra capacity, and we get computation shifted to the new data center.”

Markets vs. hierarchies? How about economist-made markets within hierarchies! Adwords itself is an interesting case I now want to know more about. What does it mean that every time a user searches an auction is held? Has Google managed to produce a system that actually has a market for every moment in time, a market for every desire?

Last, a bit about the spread of “Googlenomics”:

Since Google hired Varian, other companies, like Yahoo, have decided that they, too, must have a chief economist heading a division that scrutinizes auctions, dashboards, and econometric models to fine-tune their business plan. In 2007, Harvard economist Susan Athey was surprised to get a summons to Redmond to meet with Steve Ballmer. “That’s a call you take,” she says. Athey spent last year working in Microsoft’s Cambridge, Massachusetts, office.

Can the rest of the world be far behind? Although Eric Schmidt doesn’t think it will happen as quickly as some believe, he does think that Google-style auctions are applicable to all sorts of transactions. The solution to the glut in auto inventory? Put the entire supply of unsold cars up for bid. That’ll clear out the lot. Housing, too: “People use auctions now in cases of distress, like auctioning a house when there are no buyers,” Schmidt says. “But you can imagine a situation in which it was a normal and routine way of doing things.”

Sometimes I think that internet tycoons don’t fully understand how unique their products are, and I wonder if this is one of them. AdWords can have millions and millions of auctions per day because each auction is almost free, and because the product being sold is entirely electronic. Would the same kind of positive outcomes be possible from something like cars? What would that even mean? Are houses and cars and text ads similar enough? What will economist do to them going forward to make them more similar? Might they try and package them up as securities to sell and trade?

Oh wait, we kinda tried that one already…

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