Tuesday, May 26, 2009

Does the New York Times need a Hal Varian?

Wired has a great story on how google uses auctions to sell advertising, a story that focuses on the economist Hal Varian. From the Wired story:
Google had already developed the basics of AdWords, but there was still plenty of tweaking to do, and Varian was uniquely qualified to "take a look." As head of the information school at UC Berkeley and coauthor (with Carl Shapiro) of a popular book called Information Rules: A Strategic Guide to the Network Economy, he was already the go-to economist on ecommerce.

At the time, most online companies were still selling advertising the way it was done in the days of Mad Men. But Varian saw immediately that Google's ad business was less like buying traditional spots and more like computer dating. "The theory was Google as yenta—matchmaker," he says. He also realized there was another old idea underlying the new approach: A 1983 paper by Harvard economist Herman Leonard described using marketplace mechanisms to assign job candidates to slots in a corporation, or students to dorm rooms. It was called a two-sided matching market. "The mathematical structure of the Google auction," Varian says, "is the same as those two-sided matching markets."

Varian tried to understand the process better by applying game theory. "I think I was the first person to do that," he says. After just a few weeks at Google, he went back to Schmidt. "It's amazing!" Varian said. "You've managed to design an auction perfectly."

To Schmidt, who had been at Google barely a year, this was an incredible relief. "Remember, this was when the company had 200 employees and no cash," he says. "All of a sudden we realized we were in the auction business."
Would the New York Times need a Varian? The reason I ask is, NYT ranks search terms, but it doesn't seem to know much about why they are important -- and, by extension, if there's a way to make the most out of what their readers are looking for. Listen to the NPR story here. (My wife realized United Health Care was a search term because Elizabeth Edwards mentioned it on Jon Stewart. But why is "May 4, 2009" highly ranked -- because of swine flu?")


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