Google, David Kreps, and the Dread Pirate Roberts Strategy

by Henry Farrell on January 13, 2012 · 2 comments

in Political Economy,Politics Everywhere

A blogpost that I wrote elsewhere, complaining about Google, has led to a disagreement between Kevin Drum and Matt Yglesias.

Drum

Just out of curiosity, did anyone ever really believe that “don’t be evil” stuff? I mean, Google’s a big corporation. They’ve been a big public corporation for nearly eight years. Big public corporations are in business to make money and enhance their stockholders’ wealth, and that’s that. Google has long been big enough and profitable enough that they could sort of pretend otherwise now and again, but even that was only bound to last as long as their competition remained weak and ignorable. That’s no longer the case, and Google is responding normally.

Yglesias

“Just out of curiosity,” asks Kevin Drum, “did anyone ever really believe that ‘don’t be evil’ stuff?” I sort of did. Not because I expected Google to stop acting like a money-making operation and start running itself like a charity, but because I thought “when faced with a short-term tradeoff between degrading the user experience and increasing revenue, choose the better user experience” is a completely reasonable business strategy for a well-capitalized highly-profitable firm. That was the spirit I took “don’t be evil” to be evoking. The original version of this with Google was that they were running the best search engine on the Web, but also keyword-based advertising alongside the search results. Clearly you could charge more for the ads if advertising with Google boosted your PageRank. But the “evil” option there would have been genuinely short-sighted. The best way to run the company was to just act as if the corporate mission was to design the best possible search engine. For roughly similar reasons, for-profit media enterprises and their employees talk and think a lot about “journalistic ethics.” The point of these companies is to make money, but getting people to trust you and read you is a key step in that process and people prefer to read a publication whose writers and editors are motivated by some grander conception of their role than “we’re here to sell ads.”

This question is the subject of a classic paper (incomplete Google Books version) by David Kreps. Kreps is trying to figure out why it is that firms have a corporate culture, and how game theorists might conceptualize it. His answer has two parts. First – that reputations play an important coordination role, especially in situations which are ex ante difficult to predict, and that this may in turn generate problems of trust that cannot be dealt with via contract. If you fear that a business is likely to screw you over in some indeterminable way in the future, then you may be less likely to enter into an economic relationship with this business. Accordingly, a reputation e.g. for not screwing over your business partners, even when they are at your mercy, can be a valuable economic asset. Second, Kreps argues that having this reputation at the level of the firm rather than e.g. the individual who is running the firm, means that this asset can be traded on indefinitely, even as individual people swap in and out of management and ownership roles.

Of course, as another well known economist, William Goldman, has pointed out, reputations for niceness are not the only kind of reputation that is valuable. Reputations for being cruel, vindictive and merciless can also be valuable, and can also be passed on in a similar fashion.

Finally, Roberts decided something. He said, “All right Westley, I’ve never had a valet, you can try if you’d like. I’ll most likely kill you in the morning.” Three years he said that. “Good night Westley. Good work. Sleep well. I’ll most likely kill you in the morning.” It was a fine time for me. I was learning to fence, fight, anything anyone would teach me. And Roberts and I eventually became friends. And then it happened.
Well, Roberts had grown so rich, he wanted to retire. So he took me to his cabin, and told me his secret. “I am not the Dread Pirate Roberts”, he said. “My name is Ryan. I inherited the ship from the previous dread pirate Roberts, just as you will inherit it from me. The man I inherited it from was not the real dread pirate Roberts either. His name was Cummerbund. The real Roberts has been retired fifteen years and living like a king in Patagonia.” … Then he explained that the name was the important thing for inspiring the necessary fear. You see, no one would surrender to the dread pirate Westley. So we sailed ashore, took on an entirely new crew, and he stayed aboard for a while as first mate, all the time calling me Roberts. Once the crew believed, he left the ship, and I have been Roberts ever since. Except now that we’re together, I shall retire and hand the name over to someone else. Is everything clear to you?

Those who have had cause to travel by air in Europe may be familiar with Ryanair, which has opted for the Dread Pirate Roberts strategy rather than the Don’t Be Evil one (and it is a strategy – the contradiction between the ‘we will make you pay to use the toilets in your plane’ public pronouncements’ and the sober tone e.g. of their annual reports is striking and remarkable. But the bottom line is – Google has invested a lot of money (and, perhaps more importantly, foregone opportunities to behave opportunistically) in order to build up a significant business asset – a reputation for not doing anything too horrid, too obviously, with its customers. Now, arguably, it is devaluing that asset in order to counter a competitor. I have zero commercial experience, much less any access to Google’s internal data, so I can’t say whether this makes sense or not. But I do think that Matt was right to believe that self-interested firms can have very good reason not to behave badly when they have built up a reputation for ‘niceness’ (and, more importantly, David Kreps believes it too).

{ 2 comments }

Peter Hovde January 14, 2012 at 2:07 pm

I never did understand why a reputation for never leaving prisoners alive would be an incentive for people to surrender to you.

Wayne Bugg January 15, 2012 at 5:12 pm

Costco is a company that uses a business model of “not screwing their customers” to very good effect.

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