so there are these two guys they walk

into a bar now I'm not going to go there

I it could be the beginning of a joke

but I really want it to be the

introduction to the notion of artificial

scarcity and you'll see why in a minute

so let's go back to the bar first guy he

approaches the first woman that he sees

offers her a drink she turns him down

he then decides to work his way down the

bar and of course all the women watching

this they see what he's up to and they

all turn him down

now our guy I'm going to call him the

antihero he hasn't learned from its

experience in the real world so he

decides to go the virtual world goes to

the internet and joins Cupid comm and he

tries the same technique and sure enough

with the same result

they all turn him down so our antihero

is in trouble but you know what cupid

comms in trouble too and the reason they

are is that the women who have joined

Cupid calm are being inundated with

offers from men for dates they get

turned off they quit and as they quit

men quit Cupid's in trouble who you

going to call to solve this problem no

the answer is more obvious than

ghostbusters you call an economist don't

laugh you call it a commis in fact you

call two of them

this is Merlin ederly of Stanford and

Dan Ariely of Duke and they've spent a

lot of time studying the problem of

artificial scarcity and abundance in the

online dating context which is the

reason Cuba called them up and they

wanted to know how to fix their problem

in Cuba and the two economists said

they had an idea that was as simple as

it was profound just put a sharp limit

on the number of date offers that men

could make to women each month this is

the notion of artificial scarcity taking

what looks like an abundant resource

which is data offers and artificially

constraining them and The Economist said

to cupid that if you do this then men

will take their offer seriously they'll

look at more than just the women's

pictures and they actually look at their

profiles and the women will know this

and they'll be more likely to accept

date proposals artificial scarcity help

save cupid calm and other dating sites

that copied the technique today online

dating is a two billion dollar industry

in North America alone now I want to

talk about a lot more than online dating

and artificial scarcity much bigger

topic I want to try to show to you how

economists and their ideas have

contributed to the rise of the entire

internet economy and to some of the

iconic companies within it I'm sure many

of you familiar with the notion of name

your price travel that was invented by

Priceline well

name your price travel was really not

the key to their success because if you

could name your price what price would

you bid zero right or one or two and

obviously the airlines for the hotel

change would not accept the offer

the key to Priceline was not their great

advertising it wasn't the fact that you

could do searches online no the real key

to Priceline success and by the way it's

a 60 billion dollar company market cap

today the real key is they make you this

proposition they say that if you did a

particular price for a hotel room or a

flight and Priceline decides to accept

it you're bound to pay it this is called

the conditional price offer and it

basically what it does it in do

as you as the traveler to take your

offer seriously in the same way that the

artificial restriction on the dating

proposals that Cupid calm did for men so

who is the brilliant guy behind the

conditional price offer he's a smart guy

the Captain Kirk was not being there the

idea he was the pitchman and he still is

for Priceline know the real genius

behind Priceline was this guy Jay Walker

Jay studied economics as an

undergraduate at Cornell and he actually

listened and thought two steps beyond

what his lecturers told in the Cornell

and came up with the idea of the

conditional price offer which led to

Priceline and revolutionized the entire

travel industry in the United States I

have another example it's one that

you're also very familiar with it's a

search page at Google it could be in any

other search engine and what I want you

to pay attention to is that right-hand

side

the ads over there Google collects about

fifty billion dollars a year from

advertisers large and small seeking

placement on that right hand side they

auction off the sites but that's not how

the system started because when Google

was launched online advertising was in

its infancy and Google Believe It or Not

went door-to-door advertiser to

advertiser trying to get them to place

an ad next to a search term highly

laborious you quickly can see this is

not going to scale as the number of

searches exploded on Google and so the

founders of Google asked two young

engineers Eric Veatch and salka mangar

to come up with an automatic system that

would solve this problem well they were

instinctively attracted to auctions but

they were thinking about another problem

that is if they auctioned off the sites

they feared that the advertisers would

bid a very low price and then

incrementally raised

their prices just a little bit and keep

the auctions going forever and if this

happened and a lot of searches were also

going on at the same time the whole site

would crash

so it's an engineering solution they

came up with this idea that the winning

auction or the winning placement will be

the price the second highest price that

was bid plus one penny this would cut

off the auctions railey simplify the

process and in the process also solve

another problem called the winners curse

I'm sure many of you have participated

in auctions may have regretted winning

because you felt like you paid too much

pretty obvious point that the CEO of

Google at the time Eric Schmidt still

wasn't sold on the second price auction

as the way to go until he ran into this

man totally by accident in a party this

is Hal Varian at the time he was Dean of

the information Sciences school of

Berkeley and a world leading expert on

auctions and also the Internet

Schmidt asked Varian does this second

price auction make any sense why not the

first price and Varion ponder the

question and came back to Schmidt and he

said you know those two engineers they

have reinvented what this guy came up

with this is William Vickery he was an

economist at Columbia who proved

mathematically that the second price

auction was the ideal solution to the

winners curse and you know what that one

in the Nobel Prize in Economics in 1996

well now you're Eric Schmidt you think

well economists they may be able to help

Google so he persuades Hal Varian to

leave his Taylor position at Berkeley

and join Google as its first chief

economist very and then goes on to hire

an army of statisticians and economists

who helped refine the online ad auction

process and also develop other services

for the mountain view giant you know

they say that imitation is the best form

of

well guess who was watching Microsoft

from up north their chief competitor or

would-be competitor Microsoft they

wanted their own Hal Varian and they got

her

this is Susan AP Susan's a rock star

economist at Stanford world leading

expert in auction theory and she splits

her time teaching with also working as

an economist at Microsoft I have a third

example it's bigger than the first two

it's the entire business of web

retailing it's a three hundred billion

dollar industry in the United States

alone and you all know the poster child

of web retailing it's amazon.com now

many of you may think that Amazon's

success it's due to its fantastic system

of warehousing and inventory control its

able to basically send out all that

stuff that you order online but you know

Amazon and other web retailers would not

be as successful as they are without a

highly flexible transportation system

that actually would deliver all that

stuff and guess who helped bring that

system to reality economists because

back in 1980 when Jeff Bezos was just a

teenager the airline and the trucking

industries were heavily regulated every

fair and every route that they charged

or they flew or they drove had to be

approved by the government in fact there

was a rule that said to an airline that

owned a trucking outfit that it couldn't

deliver merchandise more than 20 miles

away from the airport at which the

merchandise landed this rule was

obviously in place to protect other

truckers from competition which of

course was the whole point of airline

and trucking regulation in the first

place it's why economists long opposed

it but they also oppose it for another

reason there are lots of airlines and

trucking firms they're not natural

monopolies in the same way that a local

utility is that needs regulation in

order to prevent proust price gouging no

airlines and trucks should never have

been regulated and three of the

economists who were most

listen about this or in this picture

Mike Levine Fred Cohn derives Gaskins

and trust me there were many more who

have been writing for decades that we

ought to get rid of this crazy system

well there were two politicians

courageous politicians who finally

listened to these guys and women and

persuaded Congress in 1978 and 1980

respectively to dismantle the system of

the airline and trucking regulation

against the stiff opposition of course

of those industries and you may not

recall that prices fell after

deregulation but more importantly for my

story is that deregulation unleashed

vigorous competition between the two

giants of the transportation industry

UPS and FedEx they went on to develop a

highly flexible and efficient

transportation system that was ideal for

the Internet economy so that twenty

years later when Jeff Bezos and other

web retailers came along they were able

to tap into and use this system in fact

Jeff Bezos if you're watching this you

should send a thank-you note to three of

The Economist's that I showed before and

many of the others who made your fortune

possible I want to conclude with one

final example has nothing to do with the

internet unless you want to count the 32

million people who play some form of

online fantasy sports I mentioned sports

because on the sports nut and I want to

talk to you about Moneyball I'm sure

many of you've seen the movie it's based

on a book yes go ahead and applaud

fantastic book and movie and it's

written by this man Michael Lewis who by

the way I think is probably one of the

best non-fiction writers in America or

the world for that matter and money boys

you know was about Billy Beane the

general manager of the Oakland A's who

built a great baseball team on a

shoestring budget but Moneyball really

wasn't a traditional baseball movie in

the same way that Bull Durham or Gila

dreams was no the real hero the real

hero of Moneyball was this guy now many

of you may not recognize him but I

submit to you

he had as big an influence on baseball

as Hank Aaron or Babe Ruth because he

applied economics and statistics to

showing how it was possible to produce

winning baseball he invented a field

called sabermetrics that was used by

Billy Beane and other baseball teams to

build their rosters in fact it's used

throughout professional baseball not

just their sabermetrics is used by

professional basketball teams football

teams and even hockey teams had people

like Bill James on their staff economic

thinking has revolutionized sports you

know in the course of my career I've had

the good fortune to meet many many

people in the business world but

unfortunately from my perspective too

many of them have no respect for

economists they say we've never met a

payroll we meeting the economists what

what do they know

well economists help build the Internet

economy economists helped make it

possible for Amazon and other web

retailers to deliver all that stuff that

you order to your doorstep

efficiently and promptly 24/7 economists

shaped the system of online advertising

especially online auctions economists

made it possible for you to get 5-star

hotels and three-star prices economists

may even have made it possible for you

to have a date and conceivably for you

to have met your spouse I think

economists deserve some respect

that answers that don't you thank you

very much thank you