Gawker: valleywag, hal varian

Three questions for Google's economics professor

Nicholas Carlson — Wed, 17 Sep 2008 14:40:00 EDT

We would never claim to be as smart as Google's pet economics professor, Hal Varian. But rereading the blog post Varian wrote to refute claims that Google's deal to sell ads on Yahoo would raise prices, some of his points puzzled us. Were I a student in one of his Berkeley classes, I'd raise my hand to ask three questions:

Professor Varian, you wrote:

The SearchIgnite report claims that for any given keyword, Yahoo will have the ability to see whose ads are priced higher — Yahoo's or Google's — and then decide which ads to serve. Yahoo won't.

It makes us wonder: If the arrangement doesn't include some way for Yahoo to choose Google ads when they're more lucrative than its own, how does it benefit Yahoo?
Another point also confused me. You wrote:

The report assumes that Yahoo will serve Google ads for as many of its search queries as possible. Yahoo also has economic incentive to keep serving as many of their own ads as possible. They get to keep all of the revenue from those ads.

Your argument seems to be that Yahoo won't use Google ads much because they won't help Yahoo's revenues as much as Yahoo ads. But I thought the whole point of the deal was to increase Yahoo's revenues with Google's ads. We're not that good at math here, but it seems possible that some of a large number can sometimes be worth more than all of a small number.
One last question: Your two points may help Google — your employer — in an antitrust case. But they also undercut the entire basis for doing the deal. Is there some other rationale behind it? Like, say, getting back at Microsoft?

Google's econ prof explains benefits of ad monopoly

Paul Boutin — Tue, 16 Sep 2008 16:20:00 EDT

Hal Varian has a sweet gig. Not only is he Google's chief economist, but he also still holds professorships in three departments at Berkeley — Economics, the School of Information, and the prestigious Haas School of Business. Today, Varian put on his Google cap on to fisk a widely-circulated report that claimed the company's new ad deal with Yahoo would raise prices all around. It's actually worth reading, at least up to "the report suffers from a number of methodology flaws."

Google's antitrust defense — the 100-word version

Jackson West — Mon, 07 Jul 2008 17:00:00 EDT

Google has come under increasing fire for a lack of transparency in how it does everything — from keeping porn off YouTube to calculating advertising rates to determining which search results go where. I may personally distrust the wise benevolence of markets, but information asymmetry is a time-tested business tactic. In an article comparing the applied economics of Microsoft in the PC era and Google in the Internet era, the New York Times gets more of the same blather from the Googleplex regarding the enigma wrapped inside a puzzle wrapped inside the algorithm from Hal Varian, Google's in-house rent-a-quote economics guru:

Mr. Varian, Google’s chief economist, acknowledges that the company has been criticized for its lack of transparency. But he says that the Google approach is a byproduct of its virtue as a fast-moving learning machine. “The system is constantly evolving to optimize efficiency, improve ad quality and make the pricing smarter, so you don’t want set rules that say we do X and we don’t do Y,” [Google chief economist Hal] Varian explained.

Actually, if I'm not mistaken, the company did say they won't do evil, and "trust us" has been the talking point every since. Frankly, I kinda preferred Microsoft's "cross us and we'll crush you." Now that's transparency. Anderson Mancini

Inside Google's mysterious money machine, the 100-word version

Jackson West — Mon, 02 Jun 2008 14:40:00 EDT

In a nearly 1,500-word piece on Google, "The Humans Behind the Google Money Machine," the New York Times didn't say much about said humans except that one of the people who interpret the sea of data generated by Google's advertising business is a Harvard grad in his twenties. Quelle surprise! The article does quote the company's chief economist, Hal Varian (pictured), as saying Google's business is "recession-resistant," and cites criticisms by Wall Street analysts and major advertisers that the Mountain View search giant's operations are like a "black box." Granted, Wall Street firms have been using black boxes, or automated algorithms, to manage trades for years, so the criticism is rather ironic. But the real nut are the details on how you can buy Google ads on the cheap. We've pared that down to exactly 100 money-saving words.

[T]he company also looked beyond click-through rates to rank ads. Google now takes into account the “landing page” that the ad links to, and, for example, gives low grades to pages whose sole purpose is to show more ads. Soon, the loading speed of a landing page will also be considered, Mr. Fox said. These factors contribute to an ad’s “quality score.” The higher that score, the less the advertiser has to bid to secure top billing.... An advertiser with a very low quality score may have to bid so much for placement as to make it uneconomical.

There you have it — light, fast pages with minimal additional advertising means you can buy ads more cheaply than your competitors. (Photo by Joe Hall)

Why does Google do so well? They've been at it a while

Jordan Golson — Mon, 25 Feb 2008 13:40:12 EST

Berkeley professor and Google's chief economist, Hal Varian:

Google has been searching the web for nearly 10 years, which is far longer than our major competitors. It's not surprising that we've learned a lot about how to do this well. We're constantly experimenting with new algorithms. Those that offer an improvement get rolled into the production version; the others go back to the drawing board for refinement.

He continues:

So I would argue that Google really does have a better product than the competition — not because we have more or better ingredients, but because we have better recipes. And we are continuously improving those recipes precisely because we know the competition is only a click away. We can't fall back on economies of scale, or switching costs, or network effects, to isolate us from the competition. The only thing we can do is work as hard as we can to keep our search quality better than that of the other engines.

So modest. What Varian doesn't mention: Intellectual property — the "recipes" he talks about in such a folksy manner — is well understood by his fellow economists as a barrier to entry that can shield dominant players in a market from competition. Glad we could help with the lesson, Hal!