Influencing the Influencers
48 Pages Posted: 10 May 2019
Date Written: April 12, 2019
Social media influencers are online opinion leaders who often post product recommendations. Firms sometimes incentivize influencers to review products or even skew their reviews. Per FTC regulations, influencers must disclose any connection they have with the firms whose products they review. We ask the following research questions. First, what is the optimal level of affiliation (if any) from the firm's perspective? Second, what is the impact of affiliation on consumer welfare? Finally, to what extent do different disclosure regimes affect both the firm's profit and consumer welfare? Affiliation introduces positive bias to the influencer's review but also decreases the persuasiveness of the review. Given this trade-off, we show that the firm's optimal affiliation decision depends on the consumer's awareness and his prior belief on product fit. When the consumer's prior belief is low, the firm partially affiliates with the influencer to preserve the influencer's persuasiveness. In contrast, when the consumer's prior belief is high, the firm fully affiliates with the influencer to both maximize awareness and to prevent a negative review. We also show that the firm's involvement can be Pareto-improving, and a more detailed disclosure rule may hurt the consumer.
Keywords: social media influencer, word of mouth, online reviews, recommendations, Bayesian persuasion, game theory
JEL Classification: D83, M31, D82
Suggested Citation: Suggested Citation