Modeling Effective Regulation of Facebook

Key Takeaways

• Our model provides the first quantitative framework to gauge the effect tax policy or regulatory action would have on platform usage, consumer welfare, and Facebook revenues.

• The average Facebook user values their use of the platform at about $79 per month, while the company’s own quarterly reports say each user only generates $11.67 per month in ad revenue. Understanding how this relationship reacts to changes in taxation or regulation is the key to understanding what policies will be effective and which will fail.

• Taxing advertising would increase Facebook usage and consumer welfare, while taxing the number of users would do the opposite.

Executive Summary

Social media platforms break traditional barriers of distance and time between people and present unique challenges in calculating the precise value of the transactions and interactions they enable. In the case of a company like Facebook, each layer of connections creates value and attracts additional users to the platform. The compounding nature of this phenomenon gives platforms significant market power. In the face of growing scrutiny from policymakers, the media, and the public, regulators are now considering a number of proposals to ensure platforms do not abuse their market power or restrict the economic benefits of their networks from being more equitably distributed. 

In a new working paper we published entitled “How to Govern Facebook: A Structural Model for Taxing and Regulating Big Tech” we develop the first quantitative framework for regulators and business leaders to evaluate the societal consequences of changes to market structure, taxation, and platform regulation. Our model takes a structural approach to understanding participation in social media platforms that accounts for the wide range of Facebook users and establishes a rigorous methodology for measuring the essential real-world features of users’ demand for the platform. 

Our structural approach brings new insights to understanding how government interventions could have the unintended effect of exacerbating existing market distortions. Overall, our analysis suggests that policymakers should focus on redistributive rather than trust-busting tools for dealing with Facebook. A tax on targeted advertisements, or a more ambitious proposal to compensate users for watching ads and providing their data, deserve policymakers’ close attention. Policymakers should also investigate measures to encourage greater platform competition by mandating greater interoperability between social media companies. These measures would ensure more gains were passed along to consumers and would also allow Facebook to continue selling advertisements in a manner productive to all parties.