Internet Economics Teacher Dr Liad Blumrosen Office 5205

Internet Economics כלכלת האינטרנט

Teacher • Dr. Liad Blumrosen ד"ר ליעד בלומרוזן • Office: 5205 • Email: blumrosen@huji. ac. il • Office hours: Mondays, 14: 30 -15: 30 You are encouraged to come! (Please drop me a line if you plan to come) • My research interests: computational economics, Electronic commerce, Auction theory, game theory.

Course structure • Semester A: I will teach the foundations. – Should make the literature accessible. – You get some ideas for the seminar paper… • Topics: – – – – Introduction Essentials from game theory Auction theory and market design Social networks Recommendation systems Information markets More…. • Semester B: student presentations. (this week) (1 week) (~6 weeks) (~3 weeks) (1 -2 weeks) (1 week) – 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 June 1 st ! • Work in pairs (recommended, not mandatory). • One problem set towards the end of Semester A – Can only improve final grade (“Magen”).

Grade • 30% presentation • 70% seminar paper • 10% 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: add something of your own – Main goal: Raise a new research direction, phrase exact questions and challenges, one (small) step toward to solution. – Applying the result in other Internet environments. – criticism of the work. – Etc.

Resources - There will be a course web page. - All materials (slides etc. ) will be put online. - Suggested articles, book chapters, and reading suggestions will also be posted.

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: examples 1. Auctions. Let’s start with a little auction….

Auctions • Basic model: Bid = 20 Bid = 8 Bid = 12 – 1 item for sale – n bidders – Each bidder submits bid bi for the items. First-price auctions: - The bidder with highest bid wins - Pays his own bid Bid = 15 Second-price auctions: - The bidder with highest bid wins - Pays the second highest bid

Auctions • Have you ever seen a second-price auction in real life? • Yes! e. Bay, 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: Revenue in first price auction Revenue in second prize auction • 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).

Course topics: examples 1. Auctions 2. 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, e. Bay, Microsoft, Yahoo, etc. ) are hiring well-known economists to design their markets. • Use auction theory!

Course topics: examples 1. Auctions 2. Sponsored search 3. 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 (300 million active users), my. Space, gmail, MS messanger, flickr, and many more…. • Researchers from multiple disciplines: Economics, sociology, biology, computer science, physics…

Modeling Representation: 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 Bacon number 2. – Haim Topol has Bacon number 2. – Maximal known – 8 (wikipedia)

Famous distance 1: Erdös number Paul Erdös – one of the greatest mathematicians of our times. Friendship/edge : A wrote a scientific paper with B. • My Erdös number - 3 (I wrote a paper with someone that wrote a paper with Erdös ). • Robert J. Aumann’s (3), Larry Page (3), Bill Gates (4)

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? Positive vs. negative externalities.

Course topics: examples 1. 2. 3. 4. Auctions Sponsored search Social Networks 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: examples 1. 2. 3. 4. 5. Auctions Sponsored search Social Networks Recommendation (reputation) systems Information markets

Information markets 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”. Method: – We sell a bond that will pay $100 next year if Oz wins. – If people price it for $23: probability is 23%.

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, each class 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). Empirical relevant papers are also possible.

Good luck!