Multisided Platform Strategy, Taxation and Regulation: Model and Application to Facebook

Abstract

Digital platforms, such as Meta's Facebook, create value by connecting users, vendors, and contractors. Their strong supply and demand economies of scale can give them market power, and have led to increasing calls for special regulations and taxes as well as anti-trust lawsuits from the Federal Trade Commission. We construct a digital platform model that allows for heterogeneity in demand elasticity, disutility from advertising, and network effects across users and time. We analyze the model theoretically, and find conditions under which government interventions raise or lower social welfare. We calibrate our model using a survey of over 57,000 Internet users in the U.S. on their demand for Facebook. Facebook creates $14 billion in social value per month, with consumer surplus concentrated among female and older users. We simulate six proposed policies for government management of digital platforms. We find a 3% tax on Facebook's ad-revenue raises social welfare by 1.1%, by shifting Meta's incentives towards maintaining a larger platform. Achieving perfect competition in Facebook-like services, while preserving network effects across platforms, would raise social surplus from Facebook by 4.8% of current value. A "data dividend'' rebate of Meta's profits from Facebook to users would increase social surplus by 30.3%. But a Facebook breakup that left the US with two smaller, non-competitive and non-interoperable social media monopolies would decrease social surplus by 84.7%.

Keywords: Multi-Sided Platforms, Network Effects, Taxation, Regulation, Social Media, Facebook