Liking and Following and the Newsvendor: Operations and Marketing Policies Under Social Influence

37 Pages Posted: 12 Jul 2013 Last revised: 11 Sep 2014

See all articles by Ming Hu

Ming Hu

University of Toronto - Rotman School of Management

Joseph Milner

University of Toronto - Rotman School of Management

Jiahua Wu

Imperial College Business School

Date Written: September 10, 2014

Abstract

We consider a monopolistic firm selling two substitutable products to a stream of sequential arrivals whose purchase decisions can be influenced by earlier purchases. Before demand realizes, the firm faces a newsvendor problem for the two products with economies of scale in production for each. When consumers are responsive to others' decisions, social influence amplifies demand uncertainty, leading to a lower profit for the firm. We propose three solutions for the firm to better cope with or even benefit from social influence: reduced product assortment, influencer recruitment, and production postponement. Firstly, as the potential substitutability between products increases due to social influence, the firm may leverage the increased substitutability and enjoy lower cost in production by reducing product assortment. Secondly, the firm can offer promotional incentives to recruit consumers as influencers. We reveal an operational benefit of influencer marketing that a very small fraction of such influencers is sufficient to diminish sales' unpredictability. Lastly, production postponement, allowing the firm to react to pre-order information, improves the accuracy of demand forecast. The optimal production time is highly sensitive to consumers' responsiveness to others' decisions when marginal cost increase from postponing production over time is moderate.

Keywords: Social influence, Newsvendor, influencer, follower, marketing strategy, operations strategy, production postponement

Suggested Citation

Hu, Ming and Milner, Joseph and Wu, Jiahua, Liking and Following and the Newsvendor: Operations and Marketing Policies Under Social Influence (September 10, 2014). Rotman School of Management Working Paper No. 2292787, Available at SSRN: https://ssrn.com/abstract=2292787 or http://dx.doi.org/10.2139/ssrn.2292787

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Joseph Milner

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jiahua Wu

Imperial College Business School ( email )

Tanaka Building
South Kensington Campus
London, SW7 2AZ
United Kingdom
02075949851 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/j.wu

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