South-Korea’s new regulation on in-app purchases


, , , ,

I am grateful to BeFM, South Korean public radio, to give me the chance to comment on their show “Morning Wave in Busan” on South Korea’s new legislation trying to rein in the control of tech giants such as Apple and Google over payments for content in their respective app stores. We talked about increasing competition, and thereby potentially increasing quality and/or decreasing prices for consumers, while increased fraud and privacy protection issues will likely bring about a challenge. Find the full interview HERE!

Online Advertising, Data Sharing, and Consumer Control


, ,

When advertisers share consumer-relevant data (e.g., that they have visited the advertiser’s website) with ad exchanges, the facilitators of targeting consumers across the web and online advertisement auctions, these ad exchanges do not offer to share this information with other rival advertisers in the same product category. This is even true if all parties in the market (ad exchanges, advertisers, consumers, publishers) were be better off in case more information was shared.

We identify the strong property rights of advertisers (website owners) as the culprit of this undersharing of information (ad exchanges cater to advertisers with restrictive data sharing policies), and show that small tweaks such as endowing consumers with easier ways not to be tracked can even worsen that situation. Instead what it takes is a system that weakens advertisers’ property rights over consumer-generated information. When consumers are for example allowed to directly share purchase intent in a product category with ad exchanges, advertisers in equilibrium share more information themselves enabling very efficient “cross-targeting” of consumers. We show that even highly criticized initiatives such as those by Google and Apple to abandon third-party cookies may improve consumer welfare by altering the current system.

The Strategic Decentralization of Recruiting


, ,

Why do firms decentralize recruiting? Larger firms are impersonal, slow to act, and struggle to leverage expertise. Thus, we expect larger firms to decentralize hiring more often. This intuition, however, is flawed (

A 2017 study by Mercer indicates that, for the large part, the opposite is true. In “The Strategic Decentralization of Recruiting,” co-authored with my colleague Yi Chen, we show how market power in professional labor markets may justify this behavior.

The bigger a firm, the larger its market power, i.e., its ability to dampen wages across the market. On the other hand, when a firm delegates hiring to divisions, it increases wages through competition among its divisions.

Outside competitors, however, foresee that this increased level of competition makes aggressive bidding less worthwhile, and reduce their own bids for workers. As a consequence, the delegating firm may hire more skilled workers without overly raising wages.

We describe this tradeoff between market and commitment power, and the resulting delegation patterns as a function of firm size and its productivity. We find that both highly productive as well as non-productive firms never decentralize recruiting in a given labor market.

Branding Vertical Product Line Extensions


, , ,

“Branding Vertical Product Line Extensions,” a paper with Christian Schmid from U Vienna. We build a stylized model to analyze the optimal branding decision of a firm expanding its product line as a function of the vertical direction of the extension and the level of competition.

We assume that consumers are not only affected by the quality of the product they consume, but every product sold under the same brand. This relation may arise due to product confusion, conspicuous consumption, etc. The main result of the paper is that firms may employ branding as a commitment device to soften quality competition.

Under competition, firms do not recoup their full investment in R&D, advertisement, factories, etc. Therefore, they opt for the branding regime that minimizes investment. Interestingly, that means that firms often choose the branding regime preferred by consumers when expanding downwards but not when expanding upwards.

Our paper provides a potential explanation why in some markets we see firms successfully expanding downwards under an umbrella brand and upwards with individual brands (think Mercedes vs. Toyota/Lexus) and vice versa in other markets (GAP/Old Navy vs. Adidas).        

The Organization of Innovation: Property Rights and the Outsourcing Decision


, , ,

Why do firms outsource research and development for some products while they opt to conduct R&D in-house for similar ones? In our new paper, Sean Nicholson, June Pan, Michael Waldman and I argue that companies want to protect their existing product portfolio. If a firm already successfully operates in a given product category, it is more reluctant to relinquish control of the research and development of new products in order to limit cannibalization of their existing successful products.

We build a novel theoretical model and show that a firm is more likely to conduct R&D for a new product in-house if a.) the company already sells a product in the same product category, b.) the longer the patent on the existing product, and c.) the higher the market share of the existing product are. Data from the pharmaceutical industry strongly supports our findings. We control for various measures of competition and patent existence to exclude simple category specific expertise as an explanation.

Self-reported actions, signaling, and auditing


, , , , , , ,

Actions that affect the value of a service are often self-reported rather than publicly observable. The diligence of a contractor, the education level of job applicant, or the true mileage of a used car are typically reported by the seller. This opens the door for lying and misrepresentation.

In “Self-Reported Actions, Signaling, and Auditing,” my co-author Mike Waldman and I present a model in which multiple receivers bid for the service of a sender, the value of which depends on a action taken by the sender. Instead of the action itself, receivers only observe a message reported by the sender indicating which action was taken. Receivers may opt for costly auditing to verify that the message matches the action.

We find that lying may increase social welfare when the action serves as a signal of a desirable trait of the sender. A positive likelihood of misrepresentation lowers the value of the action as a signal, and therefore counteracts the well-known over-investment result in the signaling literature. Therefore, factors that promote misrepresentation, such as a lower disutility of lying or a higher auditing fee, may increase social welfare.

This result stands in stark contrast to cases in which the action does not signal the sender’s type. We also find that the level of auditing is inverse U-shaped in the probability of the sender being dishonest, and that receivers may audit more often if the action does not serve as a signal, despite gaining less information when auditing. We apply our insights to education signaling, college applications, and odometer fraud in the used car market.

Find the full text paper HERE . I will present it at this year’s virtual editions of the EEA and the ESWC.

It’s not about flattening the curve. Let’s get rid of it!


, , , ,

By now you have surely heard about “flattening the curve” and seen the pretty picture that typically comes with it. A variation even made it into the New York Times last week.


The original argument/idea behind this picture crudely goes as follows. The COVID-19 pandemic will be over once a critical fraction (“the point of herd-immunity”, estimations vary but converge typically around two thirds) of the population develops immunity against the virus. Comparing death rates from regions that were surprised and thus overwhelmed by the virus (e.g. the Wuhan region in China or Lombardy in Italy) with those who were well prepared and hence faced a smaller amount of cases per capita (e.g. South Korea or the remainder of China) teaches us that pushing the number of serious cases below the capacity of the local healthcare system saves a ton of lives.

In order to achieve herd-immunity, however, the fraction of the overall population that gets infected with the virus does not change. This is depicted by the fact that the areas below the curves above are approximately equal. While this sounds like an intriguing argument, it is not realistic. Crude calculations show that it could take years to decades until we reach that point.

What we are (or should be) after, is, in fact, a reduction of the area under the curve itself, not stretching the curve over years. Instead of achieving herd-immunity, our goal should be to eradicate the virus as quickly as possible. While we may hope that summer, a vaccination or medications will put an abrupt end to the pandemic, these are hypotheticals that are far from certain to manifest. China with its rigorous policy of social distancing is the prime example after which other countries should model their response to the virus. The Washington Post published a neat little simulation, misleadingly also referring to flattening of the curve , that exemplifies the argument and generates these neat gifs:

covid_sim Not only does the curve get stretched by means of social distancing but the area under the curve, i.e. the number of overall infected people, diminishes. Since I trust that you neither want to see exorbitant numbers of older people and the odd younger ones die, nor that you want to sit at home for the next fifteen years, let’s give it some effort for a change and stop spreading dubious conspiracy theories.

Waiting for a vaccination or effective medications is a dangerous game.  Social distancing does not only save lives, it also allows to get back to our lives significantly faster. If we want to eradicate the curve, however, governments need to take more decisive (and also painful) action than if we wanted to stretch the curve. In particular, it is insufficient to just provide recommendations and it is certainly counter-productive to propagate herd-immunity. No country should witness world-war like scenes in its hospitals due to the indecisiveness of world leaders.


Why Audi is slimming down


The car industry and personal mobility is currently subject to more change than it has been over the last century. While the technology underlying cars has constantly evolved, the concept of ownership, fuel and the human’s control over the machine did not. As was true a 100 years ago, a car is till mainly a privately owned vehicle steered by a human being and powered by fossil fuel. We are at the brink of a period, however, that puts the status quo across all these three dimension in question at the same time. Alternative fuel, ride sharing and autonomous vehicles, despite at different stages in their respective development, challenge the very nature of the car industry.

Successfully navigating strategic change requires a firm to deeply understand not only market forces, but above all its own competitive advantage and how its resources and capabilities differ from its current as well as potential future competitors. It is its current strengths that will determine the firm’s optimal strategy when responding to disruptive market events. And this, in fact, is what Audi is attempting to do. If the predominant ownership model changes in response to ride-sharing and results in a relative increase in corporate ownership, Audi is not well-positioned to satisfy the likely nature of such a demand. Neither are they  efficient enough nor is their scale of operations sufficient.

On the other hand, Audi is well known for its craftsmanship and the power of its engines. The company has been a frontrunner in the world of motor sports and when it comes to new trends, be it about style or technology. Its corporate slogan “Vorsprung durch Technik” translates as “Being ahead by means of technology” (and embodies the company’s culture much better than its alternative used in the US until 2016 “Truth in engineering.”) Audi has to focus on next generation’s upscale car customer as opposed to the masses. These customers are likely to demand an electric car that combines an elegant interior with the engine power and overall product quality the company is known for.

This is where employees enter the equation. In order to be a benefit leader focusing on an upscale niche market segment, especially in times of increased automation, does not necessarily require many but the right employees. In a fundamentally changing car industry that quite likely may lead to less car sales for Audi in general, and struggling to keep up with their rivals BMW and Mercedes, it is of utmost importance for Audi to gain market share in this segment by developing the car for tomorrow’s upscale customer. Audi needs engineers that are trained in automation and electrically powered engines and a lean company to be able to offer exceptional cars at competitive prices.

Firing up to 10,000 employees, however, clearly leaves a bad taste, especially in Audi’s home country, Germany, a market that is enormously important for the company, not only in terms of direct sales but also as an indicator or accelerator for other markets. Overall, there is no question that this move represents a gamble for Audi as a company. It appears to be a bet, however, that Audi needs to take. From a loyalty viewpoint one can question the move of firing 10,000 employees while hiring 3,000 new ones and whether employee (re-)training would have been an alternative viable option.

Amazon announces new split headquarters



After a lengthy selection process Amazon has picked Long Island City in Queens, New York City as well as Arlington, Virginia, a Washington suburb, as its second headquarter locations.

The move makes sense from several perspectives. Locating on the East Coast, Amazon will be able to attract the highly educated not interested in moving to the Northwest. Both NYC and Washington are natural targets due to both their existing workforce as well as general preferences of top university graduates to move into the area. However, both locations are sufficiently far away from busy locations to provide the company with opportunities to grow at these locations.

Besides the locations, splitting their co-headquarters could likely entirely be explained by local governments’ incentives. Undoubtedly, tax breaks and general goodwill towards the company from two different entities for half a headquarter each exceeds what Amazon could have attracted from a single location. Moreover, the split likely dampens the negative effect on housing affordability in the chosen locations.

The reportedly 50.000 new employees, many with graduate degrees, would promise a boost to each local economy. What is more, there is hope and speculation that Amazon would attract other business to settle in the area. This led more than 200 US communities to pitch to Amazon.

In the end, the company’s leaders chose to locate close to the main circles of power in the nation. A move that potentially also signals that Amazon is seeking physical proximity to political decision makers.

Lastly, the enormous recent growth of Amazon and similar companies, who bet on consumer data to optimize targeted advertising as well as pricing, creates an enormous demand for highly skilled graduates from quantitative sciences with data analytics capabilities. The reported average salary of $150,000 makes Amazon (among others) a more and more serious competitor to academia as well. The Chronicle of Higher Education quotes me briefly on this last point.

The effect of Google re-entering Chinese cyberspace


, , ,

My fellow interviewee and former Google employee Brendan Downey made some very good points when speaking on BBC Newsnight yesterday. Btw shout out to the BBC for promoting me to Associate Professor. While it is challenging to make a deeper coherent argument in less than 90 seconds, I felt it was a good conversation.

A Western tech powerhouse such as Google legitimizing China’s “Great Firewall” by introducing a censored search engine is most certainly reason for concern. Predicting the long-term effects of a potential re-entry of Google in the Chinese market, however, appears challenging.

Since Google exited in 2010, Chinese authorities have critically upped their level of censorship all by themselves, without the support of any Western company. Thus, it is unclear why the presence of a Google search engine would make matters worse than the status quo.

Contrary, disclaimers as constant reminders of censorship and supervision could potentially contribute to a desire for change of a critical mass. Moreover, the observation which topics provoke disclaimers could foster the gain of additional information within the country. From a more general perspective, market presence of strong global brands in a country in which most companies are state-run seems desirable.

It seems naive to believe that when Google exited China in 2010 under co-founder Sergey Brin, they did so mainly due the forced censorship of content. Many believe that Chinese-led cyber-attacks on its customers, specifically human-rights activists, and Google itself were the primary reason for Google’s backtracking.

In a letter Google’s employees demand to participate in ethical reviews of the company’s practices. This seems to be a brilliant idea going forward. But let’s recall that we are talking about a censored search engine as well as a news aggregation app. Neither of these likely would increase censorship when compared to the status quo but potentially offer upside. If Google though were to offer products such as email accounts or cloud services and allow Chinese authorities to access private customer information, this would turn the tides dramatically for the worse.