Recently there was some controversy on the Flickr photo sharing site about their decision to censor (ie remove from their site) someone’s photo of a child smoking a cigarette. Flickr (which is owned by Yahoo) has a policy of not allowing images of children smoking on its site. This seems sensible — smoking is bad and most people don’t want to encourage children to do it or glamourise it. Except in this case the photo in question was of a photojournalistic nature, showing realistic images of how children are affected by poverty. Should such an image be banned or not? It’s not an easy thing to decide.

That debate is too controversial, so I don’t want to get into it. But it did get me thinking about what “Web 2.0″ sites like Flickr, Facebook and others actually produce, in an economic sense. They don’t regular goods like apples and cars. They produce communities. An essential part of any community is the standards or ‘rules’ by which its members must abide. Therefore, the following two activities are essential features of the production process of a Web 2.0 business:

1. Set the rules
2. Enforce the rules

Both of these things could be somewhat complex tasks, and are likely to significantly affect the costs and revenues (and hence the profits) of such a business. In terms of setting the rules, different potential users of the community (ie its potential customers) will have different preferences about the rules. Some people won’t mind seeing pictures of children smoking, while others will hate it, and others will fall somewhere in between. In some sense this is a similar problem to a regular business choosing the quality of its product — some people prefer high quality even if it means a high price, while others prefer low quality at a low price. However, there is a crucial difference for a business that creates an online community. What people really care about is probably not the rules per se, but the activities of others in the community. Thus the community operator cannot just simply say “no photos of children smoking” unless it also enforces that rule. In other words, the operator can set whatever rules it likes, but the standard of behaviour that actually arises will be determined by how well it enforces those rules (the standard of behaviour is endogenous, if you want to use a fancy word).

Thus the value of a community to its users, and how much they are willing to pay for it if it charges subscriptions like Flickr does, depends not only on the rules that the community operator sets, but also the enforcement of these rules. In terms of rules, we could think of them lying along a continuum from “anything goes” to “very strict”. Under “anything goes”, anything at all would be allowed and no enforcement would be required. This is the policy of the infamous Japanese 2channel Internet forum, where people can post messages anonymously and without fear of censorship. As the rules become more strict, enforcement costs are likely to rise, as the rules need to be monitored by system administrators somehow, and appropriate actions taken. For example, Flickr and eBay have staffs of people dedicated to policing the rules on their sites.

However, as rules become very strict, enforcement costs might decline again. The reason is that relatively ambiguous rules leave more room for interpretation, and are more likely to lead to disputes. In the case of the Flickr picture of the kid smoking, after people protested on its site, Flickr reversed its decision to ban the photo in question. However, leaving interpretation of the rules open to judgment like this is more likely to lead to controversial decisions, which may be time-consuming and costly to resolve. Strict rules may be easier to enforce — just delete all pictures of children smoking with no further discussion entered into. So the costs of enforcement as a function of the strictness of the rules might look something like this:

In terms of implementing enforcement, online communities have a range of options. An interesting question is how much of the enforcement should be ‘centralised’ and done by the system operator’s staff, and how much should be ‘decentralised’ to the community members themselves. For example, in addition to its in-house ‘police force’, eBay relies on user reports via its feedback mechanism to help prevent fraud. As long as members care about their reputation on the site, this kind of reputation system allows the operator to ‘outsource’ some of its enforcement of the rules, and probably reduce the costs involved. The downside is that reputation systems may be susceptible to gaming or manipulation by the members themselves.

To sum up, Web 2.0 sites produce communities. Part of this process (part of the “production function” in economic jargon) is to decide the rules for standards of behaviour by community members, and to enforce the rules. The rules that are set will affect the costs of enforcement, and the level of enforcement that the operator chooses will affect the actual behaviour that occurs, which will in turn affect users’ willingness to pay to use the site, or the willingness of advertisers to pay to advertise on the site. In addition, some or all of the enforcement function can be “outsourced” (or “crowdsourced”) to the community members by using a reputation or feedback mechanism. Since the production of communities departs from production of ordinary goods and services in significant ways, I think it will be an interesting area for economic research.