Tech Companies Turn To Economists To Drive ‘Marginal Gains’

Amazon, Google, Facebook, Microsoft, Airbnb Uber, the UK’s Deliveroo the rest of the world’s major tech companies are best known for their voracious appetite for the best software developers on the global market. But they are also now on a recruitment drive to stockpile economists as they seek to squeeze out a competitive advantage from the reams of consumer behaviour data their platforms generate on a daily basis.

The economics faculty at Harvard, one of the world’s most renowned centres of economics expertise, employs around 60 economics PhDs as faculty members. Amazon, the online retail giant, has around 150 on its books. Google is reported to employ somewhere around 300 highly qualified economists and statisticians and Uber is home to 30 economics PhDs. British takeaway delivery app Deliveroo is currently advertising for economist roles.

While businesses hiring economists is not an entirely new phenomenon, such positions tended to exist mainly in large corporations as a board advisory role. Now even middle sized tech companies often employ a team of economists. The development has been researched by Stanford Graduate School of Business professor Susan Athey in her paper Economists in Tech.

Ms Athey puts the surge in tech companies hiring economics PhDs, with recruits ranging from new graduates to poaching experienced academics in tenured university positions, to the advent of the age of ‘big data’. The scale of large digital business models, combined with cloud computing allowing for the cost efficient storage and computation of the user data digital platforms generate is providing micro economists with the kind of statistical resource they could once have only dreamed of.

Tech companies are setting economists to work on extracting efficiency insights from that data they believe will result in a digital economy equivalent of the Japanese concept of “kaizen”, made famous in the context of the country’s car manufacturing lines. Kaizen is the concept of a large number of marginal gains combining to achieve significantly improved overall efficiency. Tech firms believe the same concept can help them significantly improve their overall revenues and margins.

Hal Varian, the University of California economics graduate who developed Google’s original Adwords platform is generally recognised as the trailblazer for the current generation of economists in tech. He based the advertising platform’s auction model on market theory, with the cost of pay per click advertising changing dynamically with demand.

Uber’s ‘surge pricing’ fare setting model uses a similar model. The company’s econometricians, experts at interpreting market data, were tasked with using Uber user data to set fares in a way that balanced achieving the best possible payment level for drivers, and size of Uber’s cut, with long term sustainability. They found that drivers and Uber maximising fares at moments of peak demand led to short term gains but a drop in the ride hailing app’s long term popularity with users. The company’s economists then analysed historical data to set fare peaks at the optimal level for short term income that wouldn’t discourage users from using the app the next time they needed a ride.

But aside from pricing models, economists in tech companies are involved in data-based optimisation of stock levels, supply chains, warehouse locations and shipment routes at online retailers like Amazon. Their input is also now being requested in decision making processes such as website design and promotional offers.

Cookies may gather data and algorithms analyse it but tech companies have also now fully realised that those best placed to decide what those algorithms are set up to analyse, and to interpret that analyse, are academically trained economists.

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