Referral Rewards as a Coordination Device in the Presence of Network Externalities

31 Pages Posted: 19 Nov 2010 Last revised: 7 Sep 2014

Date Written: November 28, 2011

Abstract

Referral rewards programs are traditionally argued to be valuable in fostering word-of-mouth communication. However, they may also help to mitigate the coordination problem in the adoption of a new product that displays network externalities in consumption, by insuring early adopters against the risk that other consumers will wait-and-see. This paper analyzes a model that isolates this insurance purpose of referral rewards. A sufficiently generous referral reward can indeed incentivize early adoption, but this could be costly if not all consumers initially know about the product. The smaller the pool of potential early adopters relative to the population and the stronger network effects, the more likely it is that a price menu that includes referral rewards sufficient to overcome coordination failure is unambiguously beneficial for the firm.

Keywords: Network externalities, technology adoption, referral rewards, marketing strategy

JEL Classification: D21, L14, M31

Suggested Citation

Campbell, James David, Referral Rewards as a Coordination Device in the Presence of Network Externalities (November 28, 2011). Available at SSRN: https://ssrn.com/abstract=1710879 or http://dx.doi.org/10.2139/ssrn.1710879

James David Campbell (Contact Author)

Providence College ( email )

United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
73
Abstract Views
843
Rank
572,507
PlumX Metrics