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> It’s a contradiction to say the network effect protects Facebook but at the same time say they had to buy Instagram because they were successfully competing d

> It’s a contradiction to say the network effect protects Facebook but at the same time say they had to buy Instagram because they were successfully competing despite the network effect. Facebook’s network effect didn’t stop Instagram, Snapchat, WhatsApp, etc. It's not a contradiction, since network effects can be unstable over time (e.g. people get older and young people "enter the pipeline," sometimes with different preferences). By the time of the acquisitions, Friendster had disappeared and MySpace was in the throes. Facebook had the network effects at time t=0 and determined that Instagram and then WhatsApp would have the dominant network effects at t=1 and t=2, respectively. I somewhat agree that we shouldn't punish Facebook because they understood Instagram's and WhatsApp's value than Instagram or WhatsApp did, but network effects can be fickle if a company like Facebook doesn't try to co-opt/buy competitors.

alexmingoia 6y ago
I don’t follow how the existence of companies succeeding in the face of competitors with “network effects” supports the idea that network effects limit competition... I agree network effects are part of the value of the product, but I don’t see how that limits competition. Users can have both a Facebook and a Twitter, or Facebook and MySpace, etc. Network effects don’t stop people from joining other networks.
- baryphonic 6y ago
  Because MySpace was a substitute good for Facebook and vice versa. If only a fraction of (certain strongly-connected) MySpace users stop updating there and only use Facebook, MySpace's network effects collapse and thus competition decreases. This is of course what happened. I joined Facebook when it was first opened for my school (long ago). I immediately loved the UI over the XSS dumpster fire that was MySpace, but I knew like two or three people there. I kind of forgot about it, but checked back a couple months later, and suddenly I knew a bunch of people on Facebook. My days of using MySpace at that point were basically over. The data indicates this was not merely an anecdote, but basically how MySpace died. EDIT: Also, the way antitrust law is written, anything that has this kind of network effect will likely be a candidate for a monopoly. It's almost inevitable. The courts and legal establishment have over time added the criterion that antitrust should only be enforced when monopoly power harms consumer welfare (usually understood to mean higher prices), which is a much trickier proposition in the case of Facebook.

alexmingoia 6y ago

I don’t follow how the existence of companies succeeding in the face of competitors with “network effects” supports the idea that network effects limit competition... I agree network effects are part of the value of the product, but I don’t see how that limits competition. Users can have both a Facebook and a Twitter, or Facebook and MySpace, etc. Network effects don’t stop people from joining other networks.

baryphonic 6y ago
Because MySpace was a substitute good for Facebook and vice versa. If only a fraction of (certain strongly-connected) MySpace users stop updating there and only use Facebook, MySpace's network effects collapse and thus competition decreases. This is of course what happened. I joined Facebook when it was first opened for my school (long ago). I immediately loved the UI over the XSS dumpster fire that was MySpace, but I knew like two or three people there. I kind of forgot about it, but checked back a couple months later, and suddenly I knew a bunch of people on Facebook. My days of using MySpace at that point were basically over. The data indicates this was not merely an anecdote, but basically how MySpace died. EDIT: Also, the way antitrust law is written, anything that has this kind of network effect will likely be a candidate for a monopoly. It's almost inevitable. The courts and legal establishment have over time added the criterion that antitrust should only be enforced when monopoly power harms consumer welfare (usually understood to mean higher prices), which is a much trickier proposition in the case of Facebook.