Hal Varian on Taking the Academic Approach to Business

Episode Summary

Executive Summary: Hal Varian argues that the Internet and algorithmic systems have not eliminated market frictions so much as reshaped them: search empowers consumers, price discrimination is constrained by competition, and mechanism design remains most valuable where incentives are misaligned, especially in health, auctions, privacy, and digital platforms. He stresses that theory still matters, but must be blended with empirical work and real-world institutional constraints.

Main Topics: Sales, price discrimination, and consumer search: Varian explains his classic theory of sales as a way to segment consumers and emphasizes that the Internet strengthens consumer search, limiting extreme price discrimination and making comparison shopping easier. Auctions and mechanism design in practice: He discusses first-price vs. second-price auctions, descending auctions, buyer premiums at Sotheby's, winner's curse, and how auction design is evolving as software and mobile infrastructure lower implementation costs. Digital markets: journals, textbooks, spam, and piracy: The conversation covers why journals and textbooks remain expensive, how access incentives fall on libraries rather than end users, and why spam and music piracy have been contained by better technology and user convenience. Google, ads, privacy, and platform behavior: Varian describes applying economics at Google, including ad auctions, accounting, privacy controls, and why Google is viewed differently from Facebook because its value proposition is more transparent and bounded. Behavioral economics and fairness: He revisits envy, endowment effects, and consumer self-control, arguing that behavioral considerations should complement standard models in pricing, labor, and organizational design. Theory, empirics, and economics education: Varian defends teaching foundational micro and duality because they remain essential for reading current research, while also noting the rise of empirical credibility and the need for shorter journal review cycles. Technology, fragmentation, and future mechanisms: He discusses 5G, Internet fragmentation, cryptography, blockchain skepticism, prediction markets, algorithmic collusion, and the possibility of mechanism design improving sectors like health and voting.

Key Arguments: The Internet weakens extreme price discrimination because consumers can cheaply search and switch sellers. Journal pricing persists because end users are insulated from prices; libraries bear the cost, reducing protest against high subscription fees. Textbook pricing is sustained by durable-goods monopoly dynamics, where new editions must differ enough from old ones to justify high prices. Second-price and first-price auctions can be revenue-equivalent in theory, but real-world excitement, bidding behavior, and implementation details matter. Mechanism design has the greatest practical promise in sectors with badly aligned incentives, especially health care and some voting contexts. Behavioral economics is necessary because real consumers and workers exhibit self-control problems, endowment effects, and bounded understanding. Spam and piracy were expected to explode, but better search, filtering, and streaming services made legal, convenient access more attractive. Google’s products are more legible to users than Facebook’s, which may explain some of the difference in public trust and criticism. Blockchain is less compelling than cryptography more broadly; the latter has clear uses in identity, deepfakes, and secure communication, while blockchain’s inefficiencies remain problematic. Economics still needs theory, but the field has shifted toward empirics and credible identification, making faster publication and better research infrastructure more important.

Data Points: Google tenure: almost 20 years - Varian reflects on how long he has worked at Google and what that experience changed in his thinking. Journal price level: a few thousand dollars a year - He cites high annual subscription prices for electronic journals paid by libraries rather than individuals. Google account spam: basically, there's no spam on it - He contrasts his Google inbox with a private account that receives more spam. Private email spam burden: 30 seconds a week - His estimate of the time he wastes dealing with spam on a private account. Robocalls: seven or eight a day - He reports receiving this many robocalls at home despite being on the do-not-call list. Internet congestion in the U.S.: pretty good - He says fiber deployment has kept congestion manageable, with spectrum and 5G as the next challenge. Google founding scale: about 300 people - He recalls the company when he joined and notes its academic-spinoff feel. Dow Jones barrier study: 23 times - He recalls the index approaching 1,000 and backing off multiple times in his barrier analysis. Operating systems listed: 6 - He names iOS, Mac OS, Linux, Windows, Chrome OS, and Android as coexisting systems. Buyer’s premium at Sotheby’s: 15% - He discusses the fee added on top of auction winning bids for services and guarantees.

Pivotal Quotes: "Consumers have been empowered by this technology, in my view." — Hal Varian: On why the Internet limits the reach of personalized price discrimination. "The most valuable predictions would be the most sensitive predictions." — Hal Varian: Explaining why internal prediction markets ran into legal and informational constraints. "I would like to see shorter review periods for journals." — Hal Varian: On reforming economics publishing to move research into circulation more quickly.

Implications: For users, search and competition can restrain pricing power online; for firms, mechanism design and behavioral economics offer practical advantages; for researchers, theory remains vital but must adapt to faster, messier, data-rich environments.