Category Archives: business economics

Alternatives to targeted advertising

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They are not all good, as I point out in an essay about the bad old days of un-targeted advertising.

Twenty-two years ago, there weren’t large Internet companies tracking your every move and serving targeted advertising. But that does not mean that life was perfect for Internet users. Those were also the days when we were deluged with emails with the subject line Enhance Your Penis!. The emails were sent indiscriminately. There was no interest in penis-enhancement products on the part of the vast majority of recipients, quite a number of whom did not even have penises.

Ethan Zuckerman on the Internet business environment

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He says,

I’ve been thinking a lot lately about how you’d launch rival social networks. My sense is that unless you can find something that lets you stay in touch with your friends that are already on Twitter and Facebook, you sort of have no prayer of launching anything new. And so my analogy for this is to say, imagine that you had a web browser that could only look at Facebook. It couldn’t look at any other website. Well, that’s what we had more or less in the days of AOL and CompuServe. They finally had to open up, otherwise they would die. But that was that walled-garden model.

In many ways, that’s now what we’re all dealing with on our phones, you know? My Facebook app won’t let me look at Twitter, and it won’t let me look at Mastodon, and it won’t let me look at anything else. I would really like to get back to the moment where I could have a single application that could let me look at existing social networks and new social networks. And that seems like the sort of direction we’d need to go in if we actually wanted more competition and more creativity than we’re getting right now.

Thanks to commenter Handle for the pointer to a whole set of articles on the theme of “what went wrong on the Internet.” The entire interview has a lot of thoughts that are similar to mine. But not the last two paragraphs.

He suggests giving users information about why they are being fed certain content and certain ads. I would say that most users would do nothing with that information. By the way, that is also a valid argument against my idea for a competitor to Facebook where users give more indications of what they would like to see, rather than having it fed to them by algorithm. That is, users are too lazy to create metadata.

Which leads me to think that we need to pay attention to the problems that emerge when a service caters to users who aren’t very savvy and aren’t very pro-active. The folks who need to be regulated are not the service providers–it’s the users.

As a thought-experiment, perhaps we should imagine requiring a license to use the Internet, or some parts of it. The analogy would be with a driver’s license. There are different licenses with different restrictions. I cannot drive a bus, for example. So maybe certain apps on our phone would not be available until you got the necessary license, which might require you to pass a test of some sort.

The question is not whether you would want this implemented–I am pretty sure that I would not. But come up with ideas as if you were going to implement this, just to see how the problem looks from that perspective.

Response to a comment

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He wrote,

I really don’t understand how a libertarian economist thinks of large corporations as wrong in general.

Well, if you ask me to compare my feelings about government with my feelings about large corporations, I will sound like a libertarian economist.

But large corporations trouble me for many reasons.

1. There is a lot of power concentrated at the top.

2. By the same token, there usually are many workers who lack autonomy.

3. What I call corporate soap opera, and what most people call office politics, is a big part of life in large corporations.

4. Internally, a business is run as a command-and-control operation, not as a market. In any command-and-control setting, a lot of effort goes into gaming the system. That is, for any set of compensation policies and corporate rules, the employees mostly try to maximize their ratio of reward to effort. For its part, top management has to put a lot of effort into designing and policing the system in order to try to minimize gaming.

5. Large corporations and government tend to form symbiotic relationships, aka crony capitalism. The big corporation can negotiate for favors (“too big to fail” being one example). And big corporations are handy targets for regulation and extortion.

By the way, I found many of the comments on that post, about the Internet’s bad turn, insightful.

Estimating consumers’ surplus from information goods

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Erik Brynjolfsson, Avi Gannamaneni, and Felix Eggers have a paper on the topic. From the abstract:

We explore the potential of massive online choice experiments to measure consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the consumer surplus generated from these goods. We test the robustness of the approach and benchmark it against established methods, including incentive compatible choice experiments that require participants to give up Facebook for a certain period in exchange for compensation. The proposed choice experiments show convergent validity and are massively scalable. Our results indicate that digital goods have created large gains in well-being that are missed by conventional measures of GDP and productivity.

Pointer from Tyler Cowen.

Based on their powerpoint, I gather that the method is something like this.

1. Ask a user of, say, Facebook how much they would need to be paid to give it up for a month.

2. If they say they would give it up for $25, tell them to do it.

3. If after a month they have not used it, give them $25.

The methods that they use are really interesting, but I have doubts about the approach. I think dollars are too abstract. I would like to see a lot of “give up X or give up Y” choices offered. The authors do some of this and apparently it confirms their findings.

The values that the authors get are really high. If the median Facebook user gets over $40 a month in value from it, then Facebook is leaving a fortune on the table by not having a subscription service. Yes, they have to be careful that charging a subscription price could drive some customers away, lowering the value of the service to other customers, but the “freemium” model could be used to address that. That is, let anyone join for free, but give more privileges to subscribers.

Finally, note that if I pay less for Google Maps and other digital services than I would be willing to pay, I also pay more for my smart phone, home Internet connection, and wireless service provider than I would if all I were getting were just plain phone service. In other words, some of the “consumer’s surplus” from digital goods goes to Verizon and Apple as revenue, not to consumers.

Give up privacy, get free content: grand bargain?

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James Pethokoukis writes,

Overall, there still seems to be great satisfaction with “the internet’s grand bargain: the exchange of free or subsidized content for personalized advertising,” as Larry Downes, project director at the Georgetown Center for Business and Public Policy, writes in Harvard Business Review. And what would the internet look like if this bargain collapses due to new government data privacy regulation?

Some companies might have to find a new business model. More likely, the incumbents would be able to afford the legal overhead to comply with regulations, and new competitors would not.

If you had told me in 1994 that the Internet’s “grand bargain” would be about getting personalized advertising, I would not have been nearly so romantically taken with it. At that time, the grand bargain I was hoping for was to be able to achieve success based on taking initiative and using some technical skills instead of relying on the ability to dazzle a crowd or elbow rivals out of the way playing office politics in big organizations.

The technical architecture of the Internet put intelligence at the edges, not in the center. The social architecture would work similarly.

But that vision for the social architecture seems to me to be far from reality. Since about 2000, the intelligence at the edges has gone down, as Internet usage spread to the masses. And the intelligence at the center went up, thanks to advances in artificial intelligence and the ability to manipulate large datasets.

Imperfect business management

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Alex Tabarrok writes,

management matters and it matters in systematic and fairly easy to replicate ways. If mis-measurement explained productivity differences, Lemonis would not be able to successfully turn firms around. But he can and does. How?

Mainstream economics starts with the assumption that firms are behaving optimally. This is absurd. Firms are operated by human beings, and human beings are flawed. People always make mistakes, and there are always opportunities to improve.

I am guessing that when badly-run incumbents lack regulatory protection, it has become somewhat easier to drive them out of business. Transportation costs have come down. So have communication costs. This increases the geographic reach of strong competitors. So the worst retailers and the worst companies that need software management skills have a really hard time sticking around.

The requirement to earn a profit is probably the most important check on bad management. Non-profits can be poorly run as long as donors are tolerant. Sectors in which the government is heavily involved can be inefficient, because the government can always be counted on to boost demand and restrict entry. So my guess is that it’s easier to survive as a badly-run “green energy” firm or a badly run college than as a badly-run software company or a badly-run grocery chain. Note that I mean “badly run” in relative terms, because, again, humans are flawed, so that every company is “badly run” in absolute terms. Yes, I know that some of the “green energy” firms that received government subsidies went under, but it seems reasonable to say that they lasted longer than they would have with the same strategy and execution but no government help.

Evan Williams on media business models

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He writes,

The reason quality — of content and experience — has gone down in publishing, not up, despite the power of competition and technology, is because publishers are competing for advertiser dollars, not audience dollars. Business model is gravity. Once publishers are competing for audience dollars, the product they produce will get dramatically better.

…The average thinking, reading person reads from dozens of sources per month. Even if they were very cheap, there will be subscription fatigue. Cognitively, and economically, people will be able to rationalize a handful of content subscriptions at most (in addition to their 2–3 music/TV subscriptions).

There is not much difference between what Williams is arguing for today and what I wrote in 2001. This is one of my old essays that still holds up pretty well.

Mental Transaction Costs

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I have a new essay on mental transaction costs.

Perhaps consumers are ignorant about health care prices for a reason. When it comes to relieving pain and suffering, we do not want to take on the task of deciding between treatments based on price. Imagine having to ask yourself how much pain you would be willing to endure to save an addition $500. Or trying to choose between a high-cost treatment that is certain to work and a lower-cost treatment that has only a 75 percent chance of success.

Allowing our treatment choices to be made for us by doctors, with insurance companies in the background negotiating prices and determining what will be covered, saves us on mental transaction costs. We prefer to obtain health care without having to make cost trade-offs.

Please read the whole essay before commenting.

Try competing with Facebook

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Tyler Cowen writes,

I would instead start with the sentence “Most Americans don’t value their privacy or the security of their personal data very much,” and then discuss all the ways that limits regulation, or lowers the value of regulation, or will lead many well-intended regulations to be circumvented. Next I would consider whether there are reasonable restrictions on social media that won’t just cement in the power of the big incumbents. Then I would ask an economist to estimate the costs of regulatory compliance from the numerous lesser-known web sites around the world. Without those issues front and center, I don’t think you’ve got much to say.

He is commenting on a scheme for regulating Facebook.

I would instead start like this:

You didn’t come up with the idea. You didn’t build the business. Now that it’s here, who the heck do you think you are telling them how to run it?

That is from a brand new essay, in which I offer up my idea for a Facebook competitor. I’m sure that folks at Facebook have thought of my ideas and discarded them, probably for very good reasons. But I would much rather see people thinking like competitors rather than like fantasy-despot regulators.

The game of business strategy

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Greg Lewis says,

Sellers on eBay don’t quite know what gets them to the top of the search results in response to a query, but as they discovered when they made free shipping something that pushed you way up the rankings, suddenly everybody started offering free shipping. People figured it out.

The algorithm itself, the exposure, the possibility of being exposed to a customer might buy a product, very powerful and if you just start up-weighting certain features of the seller, what the seller is offering, then pretty soon, sellers will either figure it out or will die, in the sense that they won’t be on the platform and selling there much longer.

Pointer from Tyler Cowen. Tyler and I both find economists who work in business often to be more fascinating than pure academics.

I found that this wide-ranging interview reinforced many themes of mine. Business is turning into a strategy game. Price discrimination explains everything. Economic models tend to be too simple, and instead we need trial-and-error learning in many situations.