I agree entirely with what you say! I don’t really use Facebook any more, but I still use Smart Twitter to post my tweets onto Facebook because so many friends only live on Facebook – to them that’s the internet!!!
But I want to add that the “network effect” you speak of is observed elsewhere: why are so many tech companies in Silicon Valley? Or car companies in Detroit? In those two examples the logic is a little more concrete but the basic idea is the same – it’s a proximity effect. Sure Google could move to the middle of the desert and save a ton of money on rent and make their solar panels much more effective, but they loose much more from being out of the tech community!
Also, the free market has pre-requisites (and they’re not to be confused with effects). One of those is information – consumers need to have and be able to understand the information pertaining the product/service they’re buying. That’s why there’s standardized nutrition information on food, and labels on clothing, and oversight on pharmaceuticals that are beyond the average consumer’s comprehension, so we can make informed choices. That kind of thing is missing from all social networks – not just Facebook – and some (like Facebook) take advantage of that. It’s not really a free-market if it’s inefficient, and it might sound counter-intuitive but a little regulation could go a long way to make the market freer by helping consumers understand their choices and make informed comparisons.
Schultzter 