Interactive Contracting in Social Networks

Abstract

The last two decades have witnessed an explosive growth in the use of online social networking services. These services, commonly known as social networks, provide people with a flexible medium through which to communicate and interact with others. People and businesses alike have discovered a plethora of ways in which to capitalize on this flexibility. For example, many college students use social networks to organize events and share pictures, some musicians use social networks to market and promote their albums, and several businesses use social networks as public-relations tools. Moreover, social networks have also played prominent roles in both orchestrating and combating revolutions and public protests. Due in part to the high transaction costs involved in negotiating separate contracts with every customer, most Internet services, including social networks, rely on standard-form, electronic contracts. These standard-form contracts impose a fixed set of contractual terms upon every customer. Social network providers prepare all of the terms in these contracts, and potential consumers must either accept the social network’s contract as a whole or abstain from using the social network. The consumers themselves have no opportunity to bargain or to negotiate over the terms of the contract. Some social networks have discovered, however, that standard-form contracts are ill-equipped to accommodate the diverse interests and desires of their users. In particular, standard-form contracts are ill-suited for situations in which some users’ have interests that are mutually exclusive of other users’ interests. For example, consider a situation where User A desires “X” while User B desires “Y” from a social network. Neither User A nor User B can have both X and Y. If both users could separately negotiate with the social network, User A would contract for X and User B would contract for Y. However, because the social network uses a standard form contract to bind both users, the social network must strike a balancing act between X and Y. This result will be undesirable to at least one of the users, whose desires will be unfulfilled. Moreover, this result is also undesirable for the social network because the social network loses the ability to extract additional consideration from users who have special, but mutually-exclusive, interests.This Note advocates the use of an “interactive contract,” a variation on the standard-form contract, to resolve the problem of mutually exclusive interests. An interactive contract would mirror a standard-form contract in all respects except that, with respect to certain terms, consumers would have the ability to choose between several prewritten provisions. As a basic example, imagine a provider that deals mostly with California and Nevada customers. The provider’s standard-form contract could contain a choice-of-venue provision that reads, “Any disputes that arise under this contract will be brought in a court of the state of...” The provision then has a pull-down menu where the consumer can select either “California” or “Nevada.” Assuming that the provider prefers California law, the provider could then either charge a fee for consumers that want to select “Nevada,” or could couple the “Nevada” provision with additional terms that might be more favorable to the provider. This interactive arrangement allows different customers to better attain their interests, and it allows the provider to capitalize on the differing interests that some customers may have. Moreover, interactive contracts retain the same economies-of-scale benefits that standard-form contracts offer because the provider does not have to actively negotiate with any of its customers.