A dynamic model of usage behavior and network effects in social network sites

This paper structurally estimates a dynamic model of usage behavior and network effects in a social network site using data from MySpace.com. We view a social network as a stock of capital that yields a flow of utilities over time by creating social interactions between the owner and her friends. When one decides to use a social network site, it may have two distinct network effects: (1) one can manage an existing base of friends through social networking and thus prevent depreciation of capital stock (maintenance effect), and (2) one may acquire new friends through social networking, which results in creation of new capital stock (investment effect). Thus, we model social networking as a dynamic process, in which one's current action to use a social network site can influence the evolution of her social network. We found that realtime chat and messaging, features of MySpace.com, positively affect one's usage decision and hence achieve the intended goal of generating site traffic. However, different demographic groups may have idiosyncratic preferences for these features. Based on parameter estimates, we performed counterfactual simulations with the goal of providing managers with ways to enhance firm performance.