How do you measure the value of something that’s free?
It’s a challenge for economists who study the economic impact of the Internet revolution.
In this week’s Exploradio, we look at research that puts a price on your network of virtual friends.
How much would someone need to pay you for you to stop using Facebook?
That’s the question Kenyon College economics professor Jay Corrigan and his colleagues posed to several groups of Facebook users.
“We asked everybody to name the price that they would be willing to accept to give up Facebook for as little as a day, as much as a week, or even a year," says Corrigan.
His group then actually paid the lowest bidders in a special auction to deactivate their Facebook account for the allotted time.
Corrigan isn’t doing it because he hates the social platform. The experiment is a real-life measure of consumer surplus, defined as the difference between the most you’d be willing to pay for something, and what you actually pay for it.
So, for example, if you paid eight dollars for a ten dollar bottle of shampoo because you had a coupon, the consumer surplus is two dollars. That means you win.
“With free services that people love," says Corrigan, "the consumer surplus is obviously enormous.”
And as an economist, of course he wanted to put a number on it.
Corrigan and his colleagues held auctions at Kenyon College, in Lansing, Michigan, and with a nationwide group of Facebook users – around 2,000 people in all - to determine the true price point for giving up the service.
They used a device called a second-price, sealed bid auction, or a type of Vickrey auction.
Basically, the lowest bidder wins, but they get paid the next highest bid.
Corrigan says it's a common tool for economists who are trying to put values on new products and new services. And he hopes that in using the technique, "people will simply tell us the truth," on what Facebook is worth to them.
What is Facebook worth?
Across several populations and sample sizes Corrigan found that, "people are consistently demanding more than $1,000 a year on average to give up Facebook.”
That sounds about right to yoga teacher Anne Laing, "considering how much we use it.”
Laing uses Facebook to connect with students at a small yoga studio in Kent.
“It might be more than that," she confesses, “$1,500 or $2,000 worth of advertising. Don’t tell Facebook I said that, because I don’t pay for it!”
( There's little chance the platform will ever charge its users, according to economists.)
Laing also works on commission as a dance teacher, and like a lot of people in the gig economy, says she couldn’t survive without a Facebook presence.
“I really don’t know how else you’d reach your students.”
An essential business tool
Kenyon researcher Jay Corrigan found that people who use Facebook for its original purpose, posting family photos and keeping up with high school friends, don’t value it as much as people who use it for business.
He says there are, “people (who) are realtors or insurance salespeople, and they’re using Facebook to create connections with new potential customers and to maintain the relationships.”
He’s hesitant to extrapolate that $1,000 per year figure, “but I think it’s safe to say it’s generating many hundreds of billions of dollars worth of value for its users worldwide.”
The virtual economic impact
The thing is, Corrigan is not really that interested in social media.
He’s interested in how a ‘free’ service contributes to the overall economy.
What he’s found is that in the Internet age, improvements in our standard of living have actually slowed.
“Computers and by extension the Internet and social networks are changing the way we live," says Corrigan, "but there’s very little evidence that they’re having any impact on income or people’s productivity at work.”
Facebook, at $400 billion, is worth four times, say, Boeing Corporation, but only employs a fraction of the number of workers.
Corrigan says the hundreds of billions of dollars of value from Facebook doesn’t show up in economic measures, like G.D.P., it doesn’t provide many jobs… it’s part of a different economic bargain.
“These services aren’t really free," says Corrigan, "there’s no out of pocket cost, but there is some price that we’re paying in terms of our own privacy.”
It's an exchange in which we are not the purchaser, we’re the product.