37 Pages Posted: 18 Feb 2021 Last revised: 21 Jun 2022
Date Written: June 17, 2022
Influencer marketing is a large and growing but mostly unregulated industry. The majority of influencers are not paid based on their marketing campaigns’ success. Instead, their prices are based on engagement (number of likes and comments). This gives incentives for fraudulent behavior—for inflating engagement. We study influencer cartels, where groups of influencers collude to increase engagement to improve their market outcomes. Our theoretical model shows that such cartels mitigate the free-rider problem and may increase or decrease welfare, depending on the quality of induced engagement. We use a novel dataset of Instagram influencer cartels and confirm that the cartels increase engagement as intended. Importantly, we show that engagement from non-specific cartels is of lower quality, whereas engagement from topic-specific cartels may be as good as natural engagement. Therefore topic-specific cartels may sometimes be welfare-improving, whereas typical non-specific cartels hurt everyone.
Keywords: collusion, influencers, cartels, free-riding, commitment, cosine similarity, LDA, marketing
JEL Classification: L41, C72, L86, M31, D26
Suggested Citation: Suggested Citation