What it means for an economist to work in tech firms: Interview of R. Preston Mcafee

Tech firms are becoming ‘the workplace’ for economists.  This article reported how Amazon has hired 150 PhDs, Niranjan wrote a piece on the opportunities, Susan Athey also wrote on Economists in the tech space.

Here is an addition to this series of write-ups. Richmond Fed has a must read interview of R. Preston McAfee, who quit academia to work as an economist in firms such as Yahoo, Google and Microsoft.

He says the opportunities at tech firms provide opportunities to microeconomists:

EF: You were one of the first academic economists to move to a major technology company when you joined Yahoo as chief economist. You’ve since spent more than a decade as an economist at major technology companies. What has changed in the way that economic research is used in these firms?

McAfee: The major change is the relevance of microeconomics — the study of individual markets. 

Economists have had a big role in companies doing macroeconomics for forever, worrying about inflation, GDP, and how those broad aggregates influenced demand for the firm’s products. Microeconomists bring a very different skill set and answer very different questions.

That’s a major change in roles. Amazon, for instance, has more than 150 microeconomists. A really big thing there, and at Microsoft and at Google, is the problem of causality. Microeconomists have been studying how to get at causality — what caused something as opposed to what’s just correlated with it — for 40 or 50 years, and we have the best toolset.

Let me give an example: Like most computer firms, Microsoft runs sales on its Surface computers during back-to-school and the December holidays, which are also the periods when demand is highest. As a result, it is challenging to disentangle the effects of the price change from the seasonal change since the two are so closely correlated. My team at Microsoft developed and continues to use a technology to do exactly that and it works well. This technology is called “double ML,” double machine learning, meaning it uses machine learning not once but twice.

This technique was originally created by some academic economists. Of course, as with everything that’s created by academic economists, including me, when you go to apply it, it doesn’t quite work. It almost works, but it doesn’t quite work, so you have to change it to suit the circumstances.

What we do is first we build a model of ourselves, of how we set our prices. So our first model is going to not predict demand; it’s just going to predict what decision-makers were doing in the past. It incorporates everything we know: prices of competing products, news stories, and lots of other data. That’s the first ML. We’re not predicting what demand or sales will look like, we’re just modeling how we behaved in the past. Then we look at deviations between what happened in the market and what the model says we would have done. For instance, if it predicted we would charge $1,110, but we actually charged $1,000, that $110 difference is an experiment. Those instances are like controlled experiments, and we use them in the second process of machine learning to predict the actual demand. In practice, this has worked astoundingly well.

The pace at which other companies like Amazon have been expanding their microeconomics teams suggests that they’re also answering questions that the companies weren’t getting answered in any other way. So what’s snowballing at the moment is the acceptance of the perspective of economists. When I joined Yahoo, that was still fairly fragile.

He speaks about several things such as firms vs markets, big data, machine learning, regulation, antitrust, work culture at top tech firms and so on.

This bit on the tech industry is fascinating:

EF: What should antitrust policy be doing more generally, if anything, to respond to the dominance of some online firms in terms of market share?

McAfee: I disagree with those who find the antitrust laws inadequate. With few exceptions, I find our laws adequate for preventing monopolistic mergers, sanctioning anticompetitive behavior, and potentially offering the powerful ability to break up a firm that abuses its dominance. 

I do sometimes question the application of the laws. There have been many tech acquisitions where the target might have grown into a serious competitor for the acquirer. Facebook, Instagram, and WhatsApp all offer competing services. Perhaps more of a recognition that tech firms in adjacent markets grow into challengers is warranted, though even the merger guidelines recognize the potential for entry.

We can address monopoly power, even when legally acquired, with regulation. I realize this is incredibly unpopular at the moment, but regulation is a pendulum that swings back and forth. When electricity generation, with its sizeable scale economies, was subject to monopolization, we responded both by regulating private provision and by creating municipal utilities. We should do the same with Internet provision and for exactly the same reasons.

Of course, a lot of the discussion today is focused on FAANG — Facebook, Apple, Amazon, Netflix, and Google. I see the issues somewhat differently. First, let’s be clear about what Facebook and Google monopolize: digital advertising. The accurate phrase is “exercise market power,” rather than monopolize, but life is short. Both companies give away their consumer product; the product they sell is advertising. While digital advertising is probably a market for antitrust purposes, it is not in the top 10 social issues we face and possibly not in the top thousand. Indeed, insofar as advertising is bad for consumers, monopolization, by increasing the price of advertising, does a social good.

Amazon is in several businesses. In retail, Walmart’s revenue is still twice Amazon’s. In cloud services, Amazon invented the market and faces stiff competition from Microsoft and Google and some competition from others. In streaming video, they face competition from Netflix, Hulu, and the verticals like Disney and CBS. Moreover, there is a lot of great content being created; I conclude that Netflix’s and Amazon’s entry into content creation has been fantastic for the consumer. Who would have thought that tech geeks could actually teach Hollywood, with a century of experience, a thing or two?

That leaves Apple, and the two places where I think we have a serious tech antitrust problem. We have become dependent on our phones, and Apple does a lot of things to lock in its users. The iMessage program and FaceTime are designed to force people into the Apple ecosystem. Also, Apple’s app store is wielded strategically to lock in users (apps aren’t portable), to prevent competition with Apple services, and to prevent apps that would facilitate a move to Android. My concern is that phones, on which we are incredibly dependent, are dominated by two firms that don’t compete very strongly. While Android is clearly much more open than Apple, and has competing handset suppliers, consumers face switching costs that render them effectively monopolized.

So there are issues as to how the antitrust laws should be applied, but by and large, the framework of antitrust is fine. We shouldn’t want competition for competition’s sake; we want competition because it delivers innovation and good and cheap products. That’s how the antitrust laws have been interpreted, and so I’m happy with that.

Going back to Facebook and Google, the reason people are worried is along the lines that our ability to communicate with Grandma is through only this one company. That’s what we’re worried about. It’s not actually an antitrust issue, though. The same with fake news: We want companies to be more responsible, but I don’t think the antitrust laws are a solution to that. That’s a place where we should, as a society, look at what regulations are appropriate.

A good way to arrive at what those regulations should look like is by doing experiments. The fact that Europe and California have adopted forms of data protection is a good idea. It’s good for us to see some experiments.

The second place I’m worried about significant monopolization is Internet service. In many places, broadband service is effectively monopolized. For instance, I have only one company that can deliver what anyone would reasonably describe as broadband to my house. The FCC says I have two, but one of these companies does not actually come to my street.

I’m worried about that because I think broadband is a utility. You can’t be an informed voter, you can’t shop online, and you probably can’t get through high school without decent Internet service today. So that’s become a utility in the same way that electricity was in the 1950s. Our response to electricity was we either did municipal electricity or we did regulation of private provision. Either one of those works. That’s what we need to do for broadband.

Lots of stuff…

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