“Multi-Sided Platform Strategy, Taxation, and Regulation: A Quantitative Model and Application to Facebook § Empirical Illustration—Facebook”, 2019-10-12 (; similar):
Digital platforms, such as Facebook, Uber, and AirBnB, create value by connecting users, creators, and contractors of different types. Their rapid growth, untraditional business model, and disruptive nature presents challenges for managers and asset pricers. These features also, arguably, make them natural monopolies, leading to increasing calls for special regulations and taxes.
We construct and illustrate an approach for modeling digital platforms. The model allows for heterogeneity in elasticity of demand and heterogeneous network effects across different users. We parameterize our model using a survey of over 40,000 US internet users on their demand for Facebook. Facebook creates about 11.2 billion dollars in consumer surplus a month for US users age 25 or over, in line with previous estimates. We find Facebook has too low a level of advertising relative to their revenue maximizing strategy, suggesting that they also value maintaining a large user base.
We simulate six proposed government policies for digital platforms, taking Facebook’s optimal response into account. Taxes only slightly change consumer surplus. Three more radical proposals, including ‘data as labor’ and nationalization, have the potential to raise consumer surplus by up to 42%. But a botched regulation that left the US with two smaller, non-competitive social media monopolies would decrease consumer surplus by 44%.