The Market for Online Influence

Abstract

Recent developments in social media have morphed the age-old practice of paying influential individuals for product endorsements into a multibillion-dollar industry, extending well beyond celebrity sponsorships. We develop a parsimonious model in which influencers trade off the increased revenue they obtain from paid endorsements with the negative impact that these have on their followers' engagement and, therefore, on the price influencers receive from marketers.

The model provides testable predictions that match suggestive evidence, reveals a novel type of inefficiency that emerges in this market, and clarifies the role of search technology and advice transparency in shaping market activity. In particular, we show that recent policies that make paid endorsements more transparent can backfire, whereas an increase in the effectiveness of the search technology that matches followers to influencers has both direct and strategic positive welfare effects.

Our model informs influencers on how to optimally select their mix of products endorsement and organic content. It also shows that managers of platforms hosting influencers may gain from investing in algorithms that screen good influencers and match them to core platform users. This strategy creates competitive pressure amongst influencers to provide better advice, thereby increasing the value of the platform's advertising service. In fact, regulators may also find it beneficial to encourage the implementation of these strategies, because the increase in overall welfare is large, and may not be fully appropriated by platforms.