Pricing Network Effects: Competition

56 Pages Posted: 27 Nov 2016 Last revised: 7 Mar 2019

See all articles by Itay P Fainmesser

Itay P Fainmesser

Johns Hopkins University - Carey Business School

Andrea Galeotti

University of Essex

Date Written: March 5, 2019

Abstract

This paper studies the practice of influencer marketing in oligopoly markets and its effect on market efficiency. We develop a duopoly model in which firms sell horizontally differentiated products. Consumers are influenced by other consumers’ choices, and some consumers are more influential than others. Firms’ influencer marketing strategy involves discovering the influence of a subset of consumers and price discriminating based on this information.

In equilibrium, firms subsidize consumers whose influence is above average and charge premia to below average influential consumers; the equilibrium premia/discounts depend on the strength of network effects and the level of information that firms have on consumers’ influence. From a normative perspective, we show that influencer marketing leads to inefficient consumer-product matches. Firms’ investments in discovering consumers’ networks are strategic complements, leading to a race for information acquisition that erodes total surplus and firms’ profits but increases consumer surplus.

Suggested Citation

Fainmesser, Itay Perah and Galeotti, Andrea, Pricing Network Effects: Competition (March 5, 2019). Johns Hopkins Carey Business School Research Paper No. 17-08. Available at SSRN: https://ssrn.com/abstract=2874886 or http://dx.doi.org/10.2139/ssrn.2874886

Itay Perah Fainmesser (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://https://sites.google.com/site/itaypfainmesser/home

Andrea Galeotti

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
310
Abstract Views
1,131
rank
101,254
PlumX Metrics