Do Online Social Networks Increase Welfare?
University of Navarra, IESE Business School
Mallesh M Pai
University of Pennsylvania
November 2, 2014
IESE Business School Working Paper No. WP-1118-E
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.
Number of Pages in PDF File: 36
Keywords: social networks; advertising; search
Date posted: December 7, 2015