Consumer Referrals

46 Pages Posted: 26 Oct 2013 Last revised: 18 Nov 2014

Date Written: November 14, 2014

Abstract

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

Arbatskaya, Maria and Konishi, Hideo, Consumer Referrals (November 14, 2014). Available at SSRN: https://ssrn.com/abstract=2345306 or http://dx.doi.org/10.2139/ssrn.2345306

Hideo Konishi

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-1209 (Phone)
617-552-2308 (Fax)

No contact information is available for Maria Arbatskaya

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