Chapter 16, Problem 1BCQ

To determine

What type of externality is present in social networking platforms. Or SNPs? Explain why Friendster and Facebook, two SNPs that were direct competitors, were unlikely to both service. Explain why the loser, Friendster, declined so quickly.

Introduction: Externalities are used to explain costs and benefits that occur externally. External costs are referred to as negative externalities while external benefits are called positive externalities.

Network externalities are said to happen when the value of a good or service increases as more and more people engage in the consumption or production of the commodity.

Explanation of Solution

Social media is a platform to virtually interact with people using a desktop or any mobile device that can connect to the internet.

Information about a particularly popular topic finds its way on social media platforms very fast. This exchange of general and technical information that has great potential to improve or initiate productivity is called a network externality, where technology innovated in an economy leads to the growth and development of other business and economic activities.

The decline of the websites with low popularity is accredited to preference and efficiency of the dominant website when compared to these sites. Although the newer players are efficient in fulfilling the needs of the consumer, as seen in the case of network externalities, the problem-solving techniques of one producer is adopted by rest of the players.

The process of decline is seen to be systematic. The fall starts with reduced users or consumers of the service, as the number of people using the product starts to decrease so does the number of connected users on a social media website, meaning lesser and lesser people to interact with. Finally, the developers cease to develop the technology, utility and enhance the user experience.