Referral, Learning and Inventory Decisions in Social Networks

53 Pages Posted: 16 Nov 2018 Last revised: 2 Mar 2021

See all articles by Guangwen Kong

Guangwen Kong

Temple University-Fox School of Business

Ankur Mani

University of Minnesota - Twin Cities - Industrial and Systems Engineering

Yuanchen Su

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: February 19, 2021

Abstract

With the proliferation of digital social networks and social media like Facebook, Twitter, and Instagram, businesses increasingly used referral programs to increase market exposure and sales. We study the interactions between social learning and referral programs and examine their impact on demand uncertainty and firms' inventory decisions. We characterize customers' purchasing strategies based on their knowledge of their own preference types and their observation of others' purchasing decisions and then derive the demand distributions when customers are involved in social learning in a referral program. While customers who lack knowledge of their own preferences introduce bias to the demand expectation, social learning reduces the bias at the expense of increasing demand variance. We examine two effects of stock-outs: (i) the \emph{market exposure effect} is the negative effect of stock-out of one product on the sales of another product due to the structure of referral program, and (ii) the \emph{demand substitution effect} on customer's choices when one product goes out of stock. We characterize the optimal inventory levels for a different number of referrals. We find that the optimal inventory levels are governed by different combinations of the two effects under different ranges of the number of referrals. For a low number of referrals, the market exposure effect is dominant because the stock-out of one product can end the referral chains while for a high number of referrals the substitution effect is dominant because the referral chains do not end until either both products are out of stock or all customers are reached through referral chains. In the middle range of values for the number of referrals, both effects become important because the stock-out of the more popular product can lead to the end of referral chains while the stock-out of the less popular product may not end referral chains and cause substitution by customers. These effects are not observed in traditional inventory problems and are present due to the rich interaction between social learning and referral program structure.

Keywords: referral program, social learning, inventory management

Suggested Citation

Kong, Guangwen and Mani, Ankur and Su, Yuanchen, Referral, Learning and Inventory Decisions in Social Networks (February 19, 2021). NET Institute Working Paper No. 18-15, Available at SSRN: https://ssrn.com/abstract=3267076 or http://dx.doi.org/10.2139/ssrn.3267076

Guangwen Kong (Contact Author)

Temple University-Fox School of Business ( email )

531 Alter Hall
1801 Liacouras Walk
Philadephia, PA 19122
United States
19122 (Fax)

HOME PAGE: http://https://www.fox.temple.edu/about-fox/directory/guangwen-kong/

Ankur Mani

University of Minnesota - Twin Cities - Industrial and Systems Engineering ( email )

111 Church St SE
Minneapolis, MN 55455
United States

Yuanchen Su

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
6126156389 (Phone)

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