WSJ: Is Google an example of a “winner take all” market, where “network effects” make it more valuable as it gets more users?
Varian: I don’t think [search] is a winner take all market at all, because it’s so easy to switch. You type a different URL into your browser. For eBay, the buyers want to go where there are the most sellers are and the sellers want to go where the buyers are. [In search] the advertisers want to be where the most users are [but] the users don’t want to be where there are the most advertisers.
Here is an interesting notion:
Varian: I think marketing is the new finance. In the 1960s and 1970s [we] got interesting data, and a lot of analytic fire power focused on that data; Bob Merton and Fischer Black, the whole team of people that developed modern finance. So we saw huge gains in understanding performance in the finance industry. I think marketing is in the same place: now we’re getting a lot of really good data, we have tools, we have methods, we have smart people working on it. So my view is the quants are going to move from Wall Street to Madison Avenue.
One of the things that I like about Hal Varian is that he has never been an academic snob. Many years ago, for example, he pointed me to The Economy of Ideas, an essay by John Perry Barlow, who had little in the way of professional economic credentials but a lot of useful insights into the issue of intellectual property in the digital age.
I'm not sure that I agree with Varian about the parallels between financial data and marketing data. In finance, the questions are fairly obvious: how can you predict returns? how do you estimate variance, and what do you do about it? etc. So you know what you want to do with the data--the trick is discovering relationships that continue to hold out of sample. People with better technical knowhow will have an advantage.
I would guess that the issues in online commerce are somewhat more open-ended. It may be relatively easy to get reliable answers using even crude statistical tools. The challenge is to come up with the most useful questions.