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Do Online Social Networks Increase Welfare?

36 Pages Posted: 7 Dec 2015  

Manuel Mueller-Frank

University of Navarra, IESE Business School

Mallesh M Pai

University of Pennsylvania

Multiple version iconThere are 2 versions of this paper

Date Written: November 2, 2014

Abstract

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

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

Manuel Mueller-Frank (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Mallesh Pai

University of Pennsylvania

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