Network effects in Facebook

Abstract

Network effects are one of the defining properties of the digital economy. It has been shown, both in theory and practice, that network effects contribute to the growth and potential success of businesses in the digital economy. In this paper, we present a quantitative case study of network effects in Facebook for the period 2011 to 2017. We estimate the value of Facebook, and analyse how this value depends on the number of Facebook users. Our results show that there are strong network effects in Facebook, as the value per user increases more than estimations obtained from Metcalfe's law. We also outline a general theory of the strength of network effects, and quantitatively estimate the strength of network effects in Facebook.