Classroom Companion: Business

 Case Study 10.1 Growth of Facebook
The theory in 
7
Box 
10.1
 can be used to study the temporal evolution of Facebook. 
.
Figure 
10.4
shows the evolution of users and revenue of Facebook from 2008 to 
2019 (Facebook’s annual revenue from 2009 to 2019, 
2019
; Number of monthly 
active Facebook users worldwide as of 4th quarter 2019, 
2020
). The revenues are 
assumed to be proportional to the potential number of advertisers. The theoretical 
curves are calculated using the formulas of 
7
Box 
10.1
 with parameters N = 7.8 × 10
9
(the current world population), M = 1.9 × 10
8
(the current worldwide number of 
companies—as estimated by 
7
datapo. com
), p = 3.7 × 10
−2
, qN = 1.9 × 10
−2
, and 
the average revenue generated per advertiser is 10 USD. The similarity between theo-
retical and observed curves is striking.
. Fig. 10.4 Market and revenue evolution of Facebook. (Authors’ own figure)
10.3 · Network Effects and MSPs

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10
entirely on the number of advertisers they can capture, which, in turn, depends 
strongly on the number or users of the social platform. For this reason, the reve-
nues of Facebook increased slowly initially as shown in 
7
Case Study 
10.1
.
The networks effects of MSPs consisting of ordinary users and advertisers (e.g., 
Facebook) can then be summarized as follows. The number of ordinary users 
enforces a strong positive network effect on the number of advertisers. The number 
of advertises, on the other hand, will have little or no effect on the number of ordi-
nary users so that the there is only cross-side network effects in the direction from 
users to advertisers. There are no network effects among advertisers though some 
of them may be competitors. Among the ordinary users, there are strong positive 
network effects; this is a major cause of growth of this type of MSPs.
In the electronic marketplace consisting of sellers and buyers (e.g., eBay), the 
sellers prefer many buyers, and the buyers prefer many sellers. Therefore, this plat-
form has positive cross-side network effects. On the other hand, the existence of 
many sellers means increased competition among seller, possibly generating a weak 
negative same-side network effect. There is generally no same-side positive network 
effect concerning buyers; however, weak network effects may be present generated 
by user reviews and word of mouth.