Signaling to a Network of Consumers

32 Pages Posted: 19 Nov 2010

Date Written: November 17, 2010

Abstract

A firm’s choices can shape patterns of consumer communication about its product. This paper examines the problem for a firm that can both set price and target sales when selling a product of hidden, exogenous quality over two sales rounds to consumers who share information locally with their neighbors in their social network. Traditional quality signaling games emphasize ‘money-burning’ equilibria, in which the high-quality firm can take some costly action to signal its type to consumers. Here, this involves the firm giving away its product to strategically chosen, highly visible consumers. However, there also exist equilibria in which the high-quality firm forgoes costly signaling, instead restricting and strategically locating early sales such that communication across the network will reveal its quality following an initial pooling period. The high-quality firm does better in such equilibria than by signaling, and for a natural refinement of the equilibrium notion these are the only equilibria of the game. More generally, in all equilibria satisfying the Intuitive Criterion, the number of sales in the first sales round is bounded above by the network graph's domination number, which is the smallest number that allows communication to reveal type to all other consumers.

Keywords: quality signaling, networks, word-of-mouth, communication, targeting, game theory

JEL Classification: D82, D83, D85, L14

Suggested Citation

Campbell, James David, Signaling to a Network of Consumers (November 17, 2010). Available at SSRN: https://ssrn.com/abstract=1710877 or http://dx.doi.org/10.2139/ssrn.1710877

James David Campbell (Contact Author)

Providence College ( email )

United States

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