46 Pages Posted: 26 Oct 2013 Last revised: 18 Nov 2014
Date Written: November 14, 2014
In many industries, firms reward their customers for making referrals. We analyze the optimal policy mix of price, advertising intensity, and referral fee for a monopoly when buyers choose to what extent to refer other consumers to the firm. We find that the firm uses its referral fee, but not its price or advertising level, to manage referrals. When consumers hold correct expectations about the true quality of the product, the firm charges the standard monopoly price. The firm always advertises less when it uses referrals. We extend the analysis to the case where consumer referrals can be targeted.
Keywords: consumer referral policy, word of mouth, referral reward program, targeted advertising, experience good
JEL Classification: C7, D4, D8, L1, M37
Suggested Citation: Suggested Citation