It's occurred to me that the ultimate answer is embodied by the classic Feynman chapter title "You just ask them".

You've got Facebook raising money at over $50 per user based on the promise of futureperfect GMO (ie trying to imitate organic) targeted advertising. Google is so worried, they're gutting their core strength and namesake to become more 'social' by facilitating pop culture, as if it were hard to find. Clearly everyone on the web wishes they were buying things all the time, but just doesn't know it yet.

Meanwhile, Pinterest comes along and stumbles into creating a community where people curate pictures, many of stuff they desire to buy either now or in the future - inherently social status symbols. They skip ads, double-down on their ability to drive sales, and directly monetize affiliate links.

It seems like "Fail fast" has a corollary of "Context is king" - If you end up with all of the cat-picture-posting users in the world, and that's what users view your site as being for, you're never going to have better monetization than generic ads.

Exactly. Advertising works least well when it's spam, slightly better when it's targeted, and best of all when it's a personal endorsement from someone you trust. When Alton Brown tells you to buy Shun knives or when Penny Arcade tells you to play SW:TOR that has a lot more impact than a random ad for wicker furniture or what-have-you.

That's something that google and facebook are working towards but perhaps they are working too indirectly.

But the whole financial sell of Facebook is that they're purporting to work towards something better than targeted advertising. Due to increase in volume of communication between people, targeted advertising is going to be eclipsed by social recommendations. But Pinterest could never have been Facebook/Pin, because half of the second N in Metcalfe's law doesn't want to see dresses and shoes.

>He was working on a scheme to get people to recommend things to their friends in return for discounts on those things."

KILL IT WITH FIRE!

This is what our brilliant minds work on, because they're chasing that damn dollar.

You can never fully escape economics, but I think a better way of looking at it is overemphasizing micro-optimization while being stuck in a small local maximum.

Is there a reasonable means to prevent people from spamming their friends to get the discount and then saying over some more trusted channel "Please disregard the spam, I haven't tried this thing and don't know whether it is good yet?"

That's small compared to the problem of arbitrage in such a scheme. Start by spamming people to buy something which gives them the largest dollar value discount on an item they don't actually want, then sell part of the discount to someone who wants it and pocket the profit.

You could reward recommendations that result in more recommendations since (hopefully anyway), people won't recommend spam to others. Then you could encourage good products spreading rapidly. But then there's a delay to the reward and users could lose interest. You could also end up dominated by a few power users.

No, there were aspects of it that I couldn't see the practical application of.

This work sounds interesting. Who was the talk by? It sounds like a student of Jon Kleinberg but I quick glance over his publications didn't reveal work on that kind of mechanism design problem.

It was this talk:

http://events.cornell.edu/event/orie_colloquium_yaron_singer...

Internet Amway ?