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Award-Winning Book:
Fortune magazine has included Professor Hal Varian’s book as one of the 75 smartest books for business education, alongside Adam Smith’s Wealth of Nations and a chapter from Keynes’ General Theory.
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Multidisciplinary Expertise:
Professor Darien holds academic appointments in three departments at UC Berkeley: Business, Economics, and Information Management. He has taught at various renowned universities, such as MIT, Stanford, Oxford, and Michigan.
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Google’s Chief Economist:
Professor Varian’s expertise in IT led him to his current role as Google’s chief economist, where he has designed the auctions for selling advertising space on search results, a significant revenue source for Google. Other tech companies are now following Google’s example and hiring chief economists.
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Previous Visit to Canterbury:
Professor Varian previously visited the University of Canterbury as an Erskine scholar in 1984. During that visit, a 40% devaluation of the New Zealand dollar occurred, making everything very affordable for visiting Americans.
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Upcoming Lecture:
The speaker introduces Professor Varian’s upcoming lecture on evolutionary business, specifically focusing on the impact of computer-mediated transactions.
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Varian’s Journey to Google:
Professor Varian explains how he became Google’s chief economist after being approached by Eric Schmidt, who had recently become Google’s CEO. Leaving his position as dean at Berkeley, Varian was intrigued by the opportunity to work in the real world, leading him to join Google.
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Google’s Growth and Economic Impact:
During Varian’s tenure at Google, the company grew from 400 to over 20,000 employees. Varian emphasizes the significant contributions economics can make to information technology and the industry’s impact on the business world. Since Varian’s appointment at Google, other tech giants like Yahoo and Microsoft have hired chief economists.

Introduction:
Hal Varian discusses waves of innovation in the IT revolution, emphasizing the role of combinatorial innovation, where component parts are combined for new innovations.

Component Parts and Combinatorial Innovation:
Thomas Jefferson’s observation led to the development of interchangeable parts using machine manufacture, sparking a series of innovations from guns to bicycles. In the 1900s, the combination of carriage, bicycle, pneumatic tires, and a gasoline engine led to the creation of the automobile. Integrated circuits, exemplified by Moore’s Law, laid the foundation for programmable chips and personal computers.

Computer Mediated Transactions:
The last 10-15 years have witnessed an explosion of innovation surrounding the internet, with bits as the component parts. Protocols like TCP-IP, HTTP, HTML, CGI, SQL, and programming languages enable rapid recombination for innovations like web pages, auctions, video streaming, and search engines. The lack of time for manufacturing and unlimited availability of bits contribute to the rapid pace of innovation.

Collaborative Computing:
Varian briefly mentions collaborative computing as an important area for future growth.

Key Implications of Internet Applications for Commerce:
The widespread use of computers in economic transactions, particularly through cash registers and web-based platforms, has revolutionized the way businesses operate. The digital recording of transactions has enabled new possibilities for data analysis, experimentation, and personalization.

Five Key Ways in which Internet Applications Impact Economic Activity:

1. Enforcing New Contracts:
The digital environment facilitates the creation and enforcement of new types of contracts that were difficult or impossible to manage in the past.

2. Better Alignment of Incentives:
Digital technologies allow for more precise tracking and monitoring of transactions, improving the alignment of incentives between parties.

3. Data Extraction and Analysis:
The vast amount of data generated by computer-mediated transactions enables businesses to extract valuable insights for decision-making.

4. Controlled Experimentation:
The digital environment allows for controlled experimentation, where businesses can test different strategies and measure their impact in real-time.

5. Personalization and Customization:
Digital technologies enable businesses to personalize and customize products and services based on individual customer preferences and behaviors.

The Importance of Contracts in Economic Transactions:
Contracts, in their simplest form, are agreements where one party agrees to do X if the other party does Y. This concept applies to exchanges of goods, services, labor, and various other economic activities. As contracts become more complex, monitoring becomes crucial to ensure that all parties fulfill their obligations. Digital technologies have transformed contract monitoring by enabling real-time verification of contract terms, reducing the risk of disputes and improving trust in online transactions.

Technological Advancements in Monitoring Contracts:
Computers have enabled people to monitor contracts better, leading to more complex exchanges and increased value. The computerization of transactions has taken monitoring to a new level.

Historical Examples of Contract Monitoring:
In 3000 BC, Mediterranean shipping used tokens (bullae) to verify the delivery of olive oil. In the 1880s, cash registers with paper tapes were invented to prevent corruption in handling money. In the 2000s, trucks have vehicular monitoring systems to track mileage, fuel consumption, and loading/unloading.

Video Store Rentals Case Study:
The original model involved stores purchasing videos, leading to limited availability and dissatisfaction for stores, customers, and distributors. A revenue-sharing model was introduced, where distributors provided videos to stores and received a share of each rental. Honest accounting was crucial, facilitated by computers, barcode scanning, and networks.

Rental Car Industry Example:
Rental car vendors have an incentive to ensure safe driving practices. Telematics devices in rental cars monitor driving behavior and provide data for monitoring contracts.

Computer-Monitored Contracts:
With vehicular monitoring systems in rental cars, drivers who speed pay a fine to the rental agency. This technology enables contract monitoring for performance that was previously impossible.

Online Advertising:
The publisher’s goal is to sell ad space, while the advertiser’s goal is to generate sales or website visits. To align these needs, the value per impression is calculated as the value per click multiplied by the clicks per impression. This allows advertisers to pay per click while publishers charge per impression, aligning incentives. Tracking expected clicks is crucial for aligning publisher and advertiser incentives. Revenue sharing occurs between publishers and advertisers when users click on ads.

Accountability in Advertising:
Computer-based advertising enables tracking ad performance, identifying effective ads, and optimizing campaigns. Search-based advertising shows relevant ads based on user searches. Contextual advertising displays ads related to the content users are reading or viewing. Mobile advertising considers location to show relevant ads based on user queries and location.

Optimizing the Buying Process:
Online vendors analyze clickstreams to identify drop-off points and streamline the purchasing process. Useful marketing relationships are estimated based on past purchases, leading to more actionable recommendations.

Key Insights:
Online transactions allow for precise contractual optimization and alignment of incentives. Data extraction and analysis of online transactions reveal valuable patterns and insights. Keyword search engine advertising illustrates the varying value of keywords based on context. Click patterns vary over the day, with peaks during morning tea time and non-work hours. Advertiser characteristics can predict success, allowing for predictive and causal modeling. Google’s success is driven by continuous experimentation and improvement. Controlled experiments enable precise tweaking and optimization of website elements. Data-driven decision-making is superior to relying on “hippos” (highly paid person’s opinions). Online environments facilitate experimentation at a fraction of the cost compared to traditional methods.

Conclusion:
Hal Varian emphasizes the transformative power of data and experimentation in online marketing. By leveraging data analysis, controlled experiments, and ongoing optimization, businesses can make informed decisions, improve effectiveness, and maximize revenue.

Optimization Through Online Transactions:
Computer-mediated transactions enable mass customization, allowing optimizations for individual behavior, as seen on Amazon with personalized webpages and product recommendations. Search engines like Google show customized ads based on personal queries.

Privacy and Trust Concerns:
With personalization come privacy considerations. Striking a balance is essential between the benefits of personalization and potential privacy concerns. Informed consent for relevant advertising and potential benefits should be considered. Concerns often stem from unintended data misuse, which is a security issue rather than a privacy issue.

Beyond Advertising:
Optimization opportunities extend beyond advertising to logistics, product design, customer feedback, recommender systems, and various business processes.

Historical Perspective:
Henry Ford’s assembly line focused on optimizing the flow of products through factories. Modern-day computers enable the optimization of the flow of ideas and information within organizations.

Optimization for Knowledge Work:
Distributing and optimizing tasks for knowledge work, similar to how mechanical work was optimized in the past. Multi-authored documents, version tracking, and optimization through cloud computing and single-file access.

Overcoming Distance Barriers:
Global collaboration is facilitated by optimizing knowledge work, allowing seamless interaction across large distances.

The Evolution of Computing:
Computing has evolved from mainframes to network workstations to personal computing and now to cloud computing. Cloud computing allows for open access to data that is stored in one place with backups in multiple locations.

Improved Information Maintenance:
Cloud-enabled collaboration improves the quality of information by allowing multiple users to access and edit documents from various devices.

Falling Barriers to Entry for Online Businesses:
The cost of assembling infrastructure has shifted from fixed to variable, allowing businesses to scale their usage of data center and storage capabilities on demand. This enables combinatorial innovation by eliminating fixed costs and allowing for parallel evolution.

Micro-multinationals and Global Communication:
Advances in communication technology have facilitated the emergence of micro-multinationals, small businesses with employees spread across different countries. This enables the combination of talent from anywhere in the world, fostering combinatorial innovation.

Challenges and Fraud Prevention:
Even with advanced monitoring technologies, fraud attempts will persist. Businesses must remain vigilant in developing new methods to detect and prevent fraudulent activities.

Experts in Economics for Thriving in the Digital Age:
Google has a team of economists to decipher data and improve business operations. Businesses require individuals who can analyze vast data sets to gain insights.

Data Analysis and Fraud Detection:
Statistical analysis can help identify fraudulent activities like click fraud in online advertising. Patterns in credit card fraud can be predicted, minimizing losses.

Personalization vs. Customization:
Personalization requires displaying information in a way that resonates with each user. Research on personalizing information based on cognitive styles is ongoing.

Potential for AI and the Role of Regulation:
Google takes precautions against AI risks, but recognizes its potential benefits. Regulators can leverage data analysis to predict economic trends.

Financial Firm Parallels in the Internet Age:
Technology companies like Google have substantial cash reserves, avoiding the leverage risks seen in financial markets. Skilled analysts are moving from finance to marketing to apply data-driven techniques.

Limits of the Free Economy:
Free online services are often supported by advertising. However, users may opt for paid services to avoid interruptions and advertisements. A balance exists between free services and the willingness to pay for interruption-free experiences.