Facebook and Network Effects
With the age of technology already in full swing, digital advertising has grown to be one of the largest markets in our economy today. Advertisers are able to pinpoint users more accurately then ever before and one company responsible for this is Facebook. Chapter 17 of Networks, Crowds, and Markets mentions the concept of network effects and Facebook is a great example for this.
Initially, Facebook had limited access to its website to a certain population such as Harvard students. We can note this initial population to be p. As Facebook expanded to more populations such as Stanford or various businesses, p grew. For Facebook to be successful, it had to maintain a fraction of p, we’ll note as z, above the tipping point of z’. That means each time it expanded to a new population, it had to be certain that enough users would sign up such that the fraction z remained above z’. If z ever fell below z’, it is possible that downward pressure would’ve drove Facebook out of business unless it implemented a massive marketing strategy. Facebook was able to creatively use network effects to establish itself as the premiere social network.
With such a massive network of users, Facebook has successfully established itself as one of the largest advertising networks as well. Facebook ads are run as cost per click and cost per mille bids. Cost per click bids are very similar to search engines in which companies only pay when a user clicks on their ad. Therefore, Facebook makes sure to show this ad to a specific population they believe will most likely click on the ad. Click per mille is a little more like a newspaper ad. Companies that pay for click per mille do not wish to target specific users, but would rather have as many people as possible view their ad. Facebook also encourages companies to determine their true value for advertising, for example, knowing how much it costs for a user to like the company page. This makes it easier for the companies to bid on the advertisement as mentioned in Chapter 9 of Networks, Crowds, and Markets.
Facebook also just recently launched a new ad network known as Atlas that gives companies access to Facebook’s massive database of user information. For example, a company can now request to know what percentage of users were shown a particular advertisement before they went out to purchase an item. Since Facebook is able to log personal data of each user, advertisers have a greater incentive to advertise through Facebook then search engines since they know their advertisements will be more targeted.
http://www.theverge.com/2014/9/30/6874785/facebook-atlas-ad-network