36 Pages Posted: 7 Dec 2015
Date Written: November 2, 2014
We consider a strategic online social network that controls information flows between agents in a social learning setting. Agents on the network select among products of competing firms of unknown quality. The network sells advertising to firms. We consider display advertising, which is standard firm-to-consumer advertising, and social advertising, in which agents who purchased that firm's product are highlighted to their friends. We show that in equilibrium, information is unbiased relative to a setting with no advertising. However, the network reduces the information agents see about others' purchases, since this increases advertising revenue. Hence consumer welfare is lower than in the first-best.
Keywords: social networks; advertising; search
Suggested Citation: Suggested Citation
Mueller-Frank, Manuel and Pai, Mallesh M, Do Online Social Networks Increase Welfare? (November 2, 2014). IESE Business School Working Paper No. WP-1118-E. Available at SSRN: https://ssrn.com/abstract=2697143