If you’re like me, microeconomics classes often end with feelings of desperation. Markets are as efficient as technology allows, arbitrage opportunities don’t exist, and what can be done that’s worth doing has already been done.
However, time and again brilliant minds have turned to economic principles to create new ideas and develop them into disruptive products. A message to econ majors: you don’t have to be resigned to not creating great ideas just because you’re not doing research in a technical field.
Take, as an example, Honest Tea, a beverage company founded by a Yale professor and his former graduate student. Their big idea was that, for many people, the level of sweetness that’ll make the best-tasting iced tea is a lot less than (or roughly half of) the typical amount of sweetener found in products available at that time. As a result, a substantial portion of the market is willing to pay for a particular type of less sweet drink. Companies that only focus on maximizing their addressable market size would miss these lucrative opportunities.
They developed the thinking further by introducing another economics concept: utility. A customer who wishes to maximize their overall enjoyment, or utility, from consuming a product would take factors like health and guilt into account. Co-founders Seth and Barry realized that cutting the sugar level a little farther back than people’s peak preference would reduce the taste by a little bit, but that loss is more than compensated for by the health and guilt-reduction effect from the low calorie amount in the resulting drink.
In effect, Honest Tea’s rigorous approach to maximizing the utility of each bottle allowed them to gain significant market share, and advanced their mission of spreading healthy habits while running a profitable business. That double-bottom line certainly tastes sweet.
On the opposite coast and in a different industry, Netflix was taking incumbents head-on with their flat-rate DVD-by-mail product. At the time when Blockbuster was gouging customers with hefty late-fees, Netflix promised movie buffs no such penalty and a reasonable monthly fee structure. In this example, the innovation came from an ingenious way to lower the marginal cost of servicing each subscriber.
The “secret sauce” came in the form of a recommendation algorithm that gives suggestions to users when they’re browsing the library. When Netflix figured out that you like watching romantic comedies, it recommended you other movies in that category. That gave Netflix the opportunity to rent out older DVDs in its library and lower the spike in demand for new releases.
Combine that with the pooling effect of a nation-wide inventory, and Netflix has created for itself a significantly lower cost structure and significant competitive advantage in that process.
I could go on and on describing how companies build enduring competitive advantage with economic principles, but it seems that some personal application is appropriate. After all, what’s the use of being brilliant if you’re not in the position to make something out of it?
Once you select an industry of interest, can we use economics to help you get a job in those roles? You bet we can. First of all, thoroughly research the requirements for your dream job. Hopefully, you have acquired the academic skills necessary and can show those on your transcript. What do we do with the bullet points that go like “passion for X” and “interest in Y”? It may seem like any applicant will make the claim that they have that passion or interest, making it impossible to really differentiate yourself. Luckily, that is not quite true.
Think about activities you did in the past as a result of your interest. For example, if you’re passionate about clean energy, maybe you attended a solar energy conference three years in a row. While it’s true that anybody could’ve joined the conference, those with no real interest probably have not done so because they did other things they’re more interested in. Hence, your participation in those activities actually is evidence for your passion.
A credible signal is one that’s harder or costlier to create by a “fake” compared to a genuinely interested applicant. Send enough of those to employers, and your resume has just migrated to the top of the pile.
As recruiting season begins, use those concepts that you’ve picked up in economics classes to land your dream job/internship, kick ass and make Yale proud. Boola, boola!
Hans Teja is a second year student at the School of Management. Contact him at hans.teja@ yale.edu.