About Us > Blog > Do Economists “Like” the Facebook IPO?

January 31, 2012

The Facebook IPO is fast approaching.  While economists and business folks everywhere attempt to determine Facebook’s value as a company (with current IPO estimates between $75 and $100 billion), we wanted to take a moment to discuss the economics behind how online social media like Facebook derive value from the customer experience.

It all boils down to network failures and how to remedy them (we have previously discussed other market failures in our own social network at the office). Offline social networks (i.e., human to human, in person, analog, shaking hands) can fail because search costs can be too high.  Translation: it can take a lot of time and effort to keep up with all your friends “offline.”  So much so that a person may fail to keep up with all of them. Think about it – have you ever just “fallen out of touch” with someone?

Social media’s value derives in large part because the search cost of keeping up with friends is dramatically reduced.  According to research conducted by Harvard Business School Professor Mikolaj Jan Piskorski, users explain that “It's hard to know what my friends are up to, but online I can catch up with them quickly.”  In addition, the search cost related to meeting new people or re-meeting old friends is much lower than in offline networks.  Through online networking you can search friends of friends and quickly be introduced to them.

How all this plays a factor in the Facebook IPO remains to be seen… but judging from the high IPO estimates, we’re guessing the low cost of networking is one aspect of Facebook everyone “likes.”

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