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Market-Clearing Networks and Facebook promotions

The social network giant Facebook has recently announced a reworking of Facebook Offers as a new source of revenue. Instead of being able to create promotions for free, companies must now pay a fee to advertise its deals to users. These promotions include company sponsored coupons and vouchers seen on users’ news feed. Fees start at $5 but increase depending on how effective the company wants its advertisement to be.

This new strategy expands Facebook’s pool of target consumers into markets shared by Groupon and other daily deals sites. The Offers reworking is an important announcement for the social media brand especially after its IPO debacle. Investors had been worried about the company’s trend of slowing revenue growth. However, this new venture shows that Zuckerberg is not running out of innovative juices and the company may be coming back stronger.

More interestingly, Facebook Offers gives us an opportunity to observe an emerging market network. If one imagines the companies as buyers and advertising space as sellers, a simple preferred seller’s graph can be constructed. The ads giving companies the most exposure or longest runtime would cost more. Companies who do not wish to invest too much into this marketing strategy would pay less. In the end, there should market-clearing prices and a perfect matching. It is a simple market with no substitutions and straightforward products. Since Offers was not run by market prices before, we can use it to study how advertisement quality changes and the effectiveness of online price discrimination. All of which would be useful for companies trying to utilize Facebook as a way to reach its customers.

Sources: http://news.cnet.com/8301-1023_3-57516700-93/facebook-offers-no-longer-free/

-dgw47

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