Thomas Krussig is a third year PhD student in the Department of Economics at the University of California, Berkeley. His research interests include industrial organization and finance, and he is currently working on a project analyzing the effects of market mechanisms on reputation systems in illegal online markets.
Krussig grew up in Santiago, Chile. Prior to attending UC Berkeley, he earned his bachelor’s degree in Business and Economics in 2012 and a master’s degree in economics in 2013, both from Pontifica Universidad Católica de Chile.
So far I have really enjoyed the classes. Kevin Murphy has an outstanding clarity and understanding of the material. My interactions with Sam and Will, the other Price Theory Fellows, have been excellent. This fellowship is such a great opportunity to hear different perspectives, which I hope will spark some creativity as I focus in on a dissertation topic. I’m looking forward to that process.
Welcome to the Price Theory Fellowship and Chicago. Your resume is filled with economics and finance education and experience. Can you describe how your interest in economics began, and how it has evolved through your studies?
My interest in economics began many years ago, in high school. I was always interested in related topics, like math and history; Eventually, I stumbled upon an economics class, but I quickly realized a lot of what they discussed just didn’t make sense to me. I was that student in class who was always asking questions. Much of the class was focused on memorization and reading newspaper articles, and I was frustrated.
When I arrived at college and took Econ 101, I suddenly got it – and I was blown away by how easily you could explain so many things with simple concepts, like opportunity costs, which we hadn’t even discussed in high school.
In Chile, we have to concentrate early on a career track, and students usually complete a master’s degree in the topic area they’d like to study during their PhD. My topic was electricity auctions in Chile, and my coursework was focused on business and economics. In my last year, I concentrated further on industrial organization. Now, at Berkeley, I’m studying empirical process in industrial organization, as well as related topics in finance.
You are fairly early in your PhD studies and haven’t settled on a dissertation topic yet, but can you discuss on your ongoing research on the role of reputation in illegal online markets?
I have been working on this project for the last year with Ben Handel and Philipp Strack at Berkeley. We are analyzing data from an illegal online market called the Silk Road, an environment where there are no rules or mechanisms for enforcing rules. If a seller doesn’t ship a package, there is no recourse for the buyer except to leave negative feedback, which creates an interesting setting for studying the effect of buyer and seller reputation. On Amazon and other similar sites, by contrast, there are reputation and enforcement components to the market.
We are now in the process of dissecting post-purchase buyer feedback on over 180,000 messages using automated text analysis in order to better understand what drives seller reputation. The market is so successful that over 90% of the time, the seller receives the highest rating (five stars). An obvious question arises: If the seller receives four or fewer stars, does it drive sales down? So far, our findings are consistent with what we expected: Reputation matters. We observe that buyers do react to negative feedback, which affects sales for unreliable or poor quality sellers.
In general, we are interested in the ways that illegal online markets are functioning, and we have found that the main driver is reputation. We also observe significant quantity discounts and some heterogeneity in the effects for different types of drugs – drugs represent over 50% of the market.
In terms of policy implications, we are trying to uncover and understand different ways for regulators to attack and disable these markets. But policy may differ depending on whether buyers are more sensitive to negative feedback because of bad quality products as opposed to negative feedback from not receiving the package or receiving a visit from law-enforcement instead.
These illegal markets are notoriously difficult and expensive to forcibly take down, and almost instantly, another pops up. Our current train of thought is to handicap the market by destroying their reputation mechanism. If law enforcement can enter the market posing as legitimate buyers and sellers, they can erode trust by reducing the likelihood that participants are facing a real member on the other end of the transaction. In theory, these small interventions can have large, rippling impacts, making both buyers and sellers wary of participating in the market.
I will be presenting this project in the Student Microeconomics Lunch organized by Steven Levitt, which will be a great time to get feedback from the Chicago community.
You are here for a semester-long fellowship in which you’ll dive into Chicago Price Theory. What are you expectations for the time you’ll spend here at the University?
Well, firstly, I’m very thankful to the BFI for this opportunity. I hope this is a wonderful, mutually beneficial experience for the BFI and for us fellows. I am most looking forward to getting to know professors and students, participating in interesting discussions, and building community while I'm here. There was a strong Chicago influence at my school in Chile, thanks to an exchange program between the two universities. Many of my professors spent time at Chicago, so I’m excited to be directly exposed to the same approach to economics and to contrast it with my previous training.
So far I have really enjoyed the classes. Kevin Murphy has an outstanding clarity and understanding of the material. My interactions with Sam and Will, the other Price Theory Fellows, have been excellent. This fellowship is such a great opportunity to hear different perspectives, which I hope will spark some creativity as I try to focus in on a dissertation topic. I’m looking forward to that process.
Thomas Krussig is one of three 2016 Price Theory Fellows attending UChicago this semester. The award, supported by the Searle Freedom Trust, is intended to introduce PhD students from economics programs around the country to the Chicago price theory tradition.