Internet Economicsהאינטרנט כלכלת

Teacher• Dr. Liad Blumrosen

בלומרוזן" ליעד ר ד

• Office: 5205

• Email: blumrosen@huji.ac.il

• Office hours: Wednesdays, 13:30-14:30(Please drop me a line if you plan to come)

Course structure• Semester A: I will teach the foundations.

– Should make the literature accessible.– You get some ideas for the seminar paper…

• Topics:– Introduction (this week)– Essentials from game theory (1 week if needed)– Auction and market design (~6 weeks)– Social networks (~3 weeks)– Recommendation systems (1-2 weeks)– Information markets (1 week)– More….

• Semester B: student presentations.– and guidance for writing the seminar paper.

Course requirements• Requirements: write a seminar paper– Choose a topic: by the end of Semester A

(submit a proposal, get approval.)– Present the related paper in class (~30 minutes).

• During semester B

– Write the seminar paper• up to 10 pages, font 12, 1.5 lines spacing.

• Submission time is May 30th !

• Work in pairs (recommended, not mandatory).

• One problem set towards the end of Semester A– Can only improve final grade (“Magen”).

Grade• 30% presentation• 58% seminar paper• 12% participation

– You will get 12 points if you attend at least 80% of the classes in both the 1st and the 2nd semester.

– If you miss the 80% in one of the semesters, you get 0 points.– You will not get a grade in the course if you attend less than 50% of

the classes in at least one of the semesters.

• 12% problem set (“magen”)

Topic selection• Everything related to Internet Economics.

• Recommended: – choose a research paper,

read it, understand it, and make it a starting point of the seminar paper.

• List of suggested papers will appear on the course web page.

• You are free to choose any other paper or topic (but I need to approve it).

Topic selection• Class presentation: present the paper– Background, main result, added value to literature.– Present to class, not to me.– In Hebrew.– Slides: In English (preferred), or Hebrew.

• Seminar paper: propose a research idea– Main goal:

A new research direction, phrase exact questions and challenges, one (small) step toward to solution.

– Idea may be theoretical, empirical or other. You need to define the framework of the research (model, goals, questions, difficulties, data resources, suggested theorems)

Resources

- Course web-page/blog:- http://interneteconomicscourse2011.wordpress.com- Not in high-learn

- All materials (slides, assignments, etc.) will be put online.

- Suggested articles, book chapters, and reading suggestions will also be posted.

? באנגלית השקפים למה

End of administrative part.

Questions?

Now, a short preview for the course.

Note: theoretical course, based and demonstrated by real world internet application.

Internet• Last two decades: information revolution.

• Communication became: quick, large bandwidth, available anytime and everywhere.

• Changes our everyday life.

• Also change commerce.

• Many large internet systems. – Can we design them without economic understanding?– Can we understand them without economic tools?

Course topics

Some examples in the next slides.

– Foundations of electronic commerce– Matching systems• Residents to hospitals, Kids to schools, Kidney

Exchange, Match.com

– Social networks– Recommendation systems– Information markets

Design and analysis

The Internet was, and still is, built by humans. Its main applications too.Economists as engineers.

In most of the course, we will try to understand the logic behind the design of Internet systems – and analyze how they are expected to work…

Course topics: examples1. Auctions.

Let’s start with a little auction….

Class Experiment

: שניה " שיטה אחריך" הבא את שלם , זוכה ביותר הגבוהה ההצעה

ההצעה הוא השניהוהתשלום. גבוהה הכי

לי - לכתוב צריך תלמיד , שתיכל אחת מחיר הצעות. מכירה שיטת לכל

-. , , מזו זו שונות להיות חייבות לא אך יכולות ההצעותלהציע - .0אפשר מעוניינים לא אם אגורות

- , מטבע אטיל אני המחיר הצעות קבלת לאחר. בוחר אני שיטה באיזו ואבחר

: ראשונה " שיטה הצעתך" את שלם , זוכה ביותר הגבוהה ההצעה. ההצעה גובה הוא והתשלום

," היא " הצעתי הצעתך את שלם תהיה המכירה 4.31אםשקלים

" היא " הצעתי אחריך הבא את שלם תהיה המכירה 5.11אםשלקים

:לדוגמא

Auctions

First-price auctions:- The bidder with highest

bid wins- Pays his own bid

• Basic model:– 1 item for sale– n bidders– Each bidder submits bid bi

for the items.

Second-price auctions:- The bidder with highest

bid wins- Pays the second highest

bid

Bid = 20 Bid = 8 Bid = 12 Bid = 15

Auctions

• Have you ever seen a second-price auction in real life?

• Yes! eBay, olsale.co.il– Ascending-price auctions are equivalent to second

price auctions.– Really equivalent?

Maximize profit – how?

• If you are a profit maximizing seller, what would you choose:

first –price or second-price auctions?

Revenue equivalence• Answer:

• How can it be?Intuition: in first price auction, people bid less then they are actually willing to pay.

• “The Revenue Equivalence Theorem”(Roger Myerson, ‘81, Nobel prize winner).

Revenue in first price auction

Revenue in second prize

auction

Course topics: examples1. Auctions2. Sponsored search

Auctions for Sponsored Search

Real (“organic”) search result Ads: “sponsored search”

Auctions for Sponsored Search

Sponsored search auctions• An online auction is run for every individual

search.

• Advertising is effective. – Targeted.– Users in search mode.

• (mostly) Pay-per-click auctions.

• First price? Second price? In about 5 classes…

Market design and sponsored search• Google’s revenue from sponsored search: Billions of

Dollars each quarter.• Every little detail matters.• Advertisers are “selfish” agents:

will manipulate the auction if possible.• Not a regular software development:

hard to experiment.

• Big internet companies (Google, eBay, Microsoft, Yahoo, etc.) are hiring well-known economists to design their markets.

• Use auction theory!

Course topics: examples1. Auctions2. Sponsored search3. Social Networks

Social Networks

US high school dating network: who have you been in romantic touch with, in the past 18 months

Social Networks

High school friendship network. Kids from different races have different colors.

Social Networks

A spread of an epidemic disease tuberculosis.

Interdisciplinary subject• In the previous slides:

social network that were studied by sociologists for years.

• What about research on facebook (over 500 million active users), mySpace, gmail, MS messanger, flickr, and many more….

• Researchers from multiple disciplines:Economics, sociology, biology, computer science, physics…

ModelingRepresentation: graph (network).

• Edge between nodes: friendship, know each other, …

• Can be directed or non directed.

• Distance between nodes: shortest path between them.

Famous distance 1: Kevin Bacon

Friendship (or edge in the graph):A played with B in the same movie

“Kevin Bacon number” – distance (shortest path) to Kevin Bacon. The Oracle of Bacon.

– Humphrey Bogart’s Bacon number 2.– Haim Topol has Bacon number 2.– Maximal known – 8 (wikipedia)

Famous distance 1: Erdös numberPaul Erdös – one of the greatest

mathematicians of our times.

Friendship/edge :A wrote a scientific paper with B.

• Robert J. Aumann’s (3), Larry Page (3), Bill Gates (4)

• My Erdös number - 3 (I wrote a paper with someone that wrote a paper with someone that wrote a paper with Erdös ).

Many interesting questions

Bacon number, Erdös number – examples for “small world phenomena”/”six degrees of separation”.

• How do social networks form? • What is their structure? • How information is spread through the network?• Close vs. distant friends.• Positive vs. negative externalities.

Course topics: examples1. Auctions2. Sponsored search3. Social Networks4. Recommendation (reputation) systems

Recommendation systems

Recommendation systems

Recommendation systems

• Possible manipulations:– Whitewashing (users with poor reputation starting

afresh)– Lack of effort/honesty in providing feedback.– Sybil attacks (create feedback from fake

identities).

• Research directions:– Economic modeling of the problem– Design manipulation-proof mechanisms.

Course topics: examples1. Auctions2. Sponsored search3. Social Networks4. Recommendation (reputation) systems5. Information markets

Information markets

Method: – We sell a bond that will pay $100 next year if Oz

wins.– If people price it for $23: probability is 23%.

What is the probability that Amos Oz will win the Nobel Prize in literature next year?

How can we estimate it? Use the “Wisdom of the Crowds”.

Information markets

intrade

Information markets

Many design issues…

• Aggregation of information.• Arbitrage prevention.• Budget balance.• Complex items (think about currency

exchange rates)

Bottom line- Most of the material in the course is

“theoretical”.

- However, topics will be motivated by real world system and analyze the rational behind its design.

- Seminar papers: most will be based on applied theory papers (math level from trivial to hard, you choose). Relevant empirical papers are also possible.

Good luck!