Uncommon Economics of Facebook

Uncommon Economics is a series of posts that discusses the “uncommon” economic concepts behind everyday things in layman terms — from technology to friendships to the University of Chicago (where I studied Economics). In this post, I discuss the concept of Marginal Utility using Facebook.

If you do not know, the University of Chicago is a place where people do not interact with each other. We are known as an antisocial, reticent, introverted type of people & enjoy the realm of ultimate reclusiveness. Honestly, we like nothing more than being alone and reading, writing books, developing theories and winning Nobel Prizes. Having the company of other people, meh. But, a fascinating tool was developed that allowed us to remain reclusive, and at the same time keep up with the world without the need for social interaction. Welcome Facebook. Facebook has disrupted not only technology, but also the field of economics. Facebook has created what I term a “Dynamic Marginal Utility.”

As I was reading “The Facebook Effect” by David Kirkpatrick, I started thinking about how economics applies to Facebook (FB). First some data on the company, as of February 2016 (taken from the FB company stats page):

1.04 billion daily active users on average for December 2015

• 934 million mobile daily active users on average for December 2015

• 1.59 billion monthly active users as of December 31, 2015

• 1.44 billion mobile monthly active users as of December 31, 2015

• Approximately 83.6% of our daily active users are outside the US and Canada

When you look at these numbers, you might think that even the University of Chicago must be active on FB, but it is a different kind of active. We are ‘passively active’, meaning most of us have FB accounts, but we mainly use it as a tool to read what is going on, rather than engage, comment or post our ideas. Yes, it is upsetting if you think about it from a normal, socially-acceptable viewpoint, but if you look at it from UofC student’s standpoint it is perfect. I have quite a few friends from different universities who are very active on FB. They post links and statuses and get 500+ likes. If you are a University of Chicago student and post links or statuses you will be lucky to get 10 likes. But that is a different issue. What we are interested in right now is exploring the law of “Dynamic Marginal Utility.”

The economist Carl Menger (1840–1921) developed the theory of marginal utility & the Law of Diminishing Marginal Utility in the “Principles of Economics”, a book everyone should read for fun. (By the way, ‘marginal’ means the change in some benefit or cost when an additional unit is produced.) To break down the Law of Diminishing Marginal Utility let us look at an example. Imagine it is a hot day outside and you step inside an ice cream store. Let us denote the satisfaction you receive from eating that cold ice cream with ‘!’, here is what the law of diminishing marginal utility would look like, ceteris paribus:

• 1 scoop of ice cream: ! ! ! ! ! ! ! (7 !)

• 2 scoops of ice cream: ! ! ! ! ! ! (6!)

• 3 scoops of ice cream: ! ! ! ! ! (5!)

• 4 scoops of ice cream: ! ! ! ! (4!)

• 5 scoops of ice cream: ! ! ! (3!)

• 6 scoops of ice cream: ! ! (2!)

• 7 scoops of ice cream: ! (1!)

• 8 scoops of ice cream: Puke

As you can see, you get a lot of utility/satisfaction from that first scoop of ice cream. As you keep on eating more and more ice cream, all other things being equal, you do not get that same level of satisfaction. You keep on eating until you actually get sick of ice cream. That is basically the law of diminishing marginal utility, more formally:

“When a person increases consumption of a good/service, holding all other things equal, there is a decrease in the marginal utility that person derives from consuming each additional unit of that product.”

Here is what a sample graph would look like of decreasing marginal utility:

Think of riding a roller-coaster in the same way. The first time you ride that roller coaster you have the best time in the world. But after you ride it over and over again, you get sick of it and eventually you stop. So how does this apply to Facebook?

Facebook, like other things in the market, is a good/service (more so a service). However, Facebook has DEFIED the Law of Diminishing Marginal Utility.

Facebook has created a service that even if you consume the same amount every day, you either get more utility, an even amount of utility or a decrease in utility. It has created a Dynamic Marginal Utility:

Dynamic Marginal Utility (example):

There are days you wake up and start sharing, posting, commenting and reading everything on Facebook. Then you become fed up, log off your account, and maybe even disable it for a few days/weeks. But then you come back on Facebook and you start using it more, even more than you used it the first time around. What Facebook has done is create a product that changes its marginal utility dynamically. Even as you consume the Facebook service, your marginal utility might diminish some days, but it varies throughout time.

Why is this important? If you are an entrepreneur or own a business you do not want customers to face a diminishing marginal utility for your product. You want people to come back, and have the same if not a better experience than they had the first time. Facebook constantly adds new features to its platform so that the user experience is refreshed or renewed when the user visits. It resets the user’s marginal utility starting point. But this is not only done through adding new features, it is also done by giving the user the ability to create content. When users create content on Facebook, they are invested in the service. As more people start ‘liking’, ‘sharing’, & ‘commenting’ on a user’s content, the utility of FB for the content creator increases dramatically. Hence, your marginal utility for Facebook increases when people interact with your own content.

Now the question arises, how do you make a dynamic utility good / service?

This is a very difficult question, but again Facebook might have the answer here. A lot of time is spent thinking about the end product or service while people forget about the inputs. Simply put, if your inputs are garbage, your output is garbage. If your input is dynamic, then you output is dynamic. So how does Facebook make its ‘input’ dynamic? I didn’t understand this until I actually went to the Facebook headquarters in Menlo Park for dinner.

Luckily, I have quite a few friends who work at Facebook. One of them was my roommate back in college at the University of Chicago. He invited my wife and me to dinner one day at Facebook and we decided to go. I had been to Facebook before, but this time I went I noticed a lot of new things. In their Building 12 (where most visitors go) they had moved things around. There were new shops, new food stations, different groups had moved to different locations, and even Mark Zuckerberg moved his personal office location. Additionally, now Facebook even opened up a new building, which has a completely different layout than current offices (currently where Mark sits). It is a completely open space, a single floor dedicated to teams working at Facebook. You go inside and there are posters on the walls, stuffed animals sitting on chairs, random art, calligraphy, hash-tags on the wall (shout out to #Muslims@FB). The building is like a memory palace (like what Sherlock Holmes uses) because there are all these random ideas, thoughts, items all over the place, but they all mean something to people at FB. It does look like random chaos, but why would a company have this?

Dynamic Utility!

Facebook changes up its office continuously and often they introduce random chaos into the equation every few months or so, because they want their employees to be used to and accept change. They want to instill it into their subconscious, so that when they think about the Facebook product, they are used to random chaos and can come up with different approaches that others cannot. Just imagine if FB was stagnant and day in and day out you did the exact same thing in the exact same location at exactly the same time. How would you come up with innovate, fresh new ideas if your mode of work was mundane, bland, unchanging? You need to disrupt the workplace (in a good way) in order to drive new ideas, thoughts & outcomes. This is the ingenuity behind Facebook’s offices and work stream. This is how you can build a dynamic utility good or service because your very input is dynamic!

So there you have it. Facebook has defied the law of diminishing marginal utility and created a product that has a dynamic marginal utility. Good job Mark, you should get an award for Economics!

When you think about starting your own company or running your own business, try to come up with a way that does not follow the law of diminishing marginal utility but rather keeps it dynamic. You want to avoid customer fatigue, and figure out new ways to refresh the customer experience and keeps your users or customers engaged. Remember, you also need to keep your workplace dynamic, and fresh. Not an easy thing to do, but it is possible, just look at Facebook. And now, I’ll go back to my Facebook account…

Update: Facebook just launched “Live Video” — once again changing the user’s marginal utility for the service!

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