42 Pages Posted: 18 Feb 2021
Date Written: February 15, 2021
Influencer marketing is a large and growing but mostly unregulated industry. We document the existence and study cartels of influencers. Using a novel dataset of Instagram influencer cartels, we confirm that the cartels increase engagement as intended. But we also show that engagement from non-specific cartels is of lower quality, whereas engagement from a topic-specific cartel may be as good as natural engagement. We then build a theoretical model to understand the behavior and welfare implications of influencer cartels. While influencer cartels may sometimes improve welfare by mitigating the free-rider problem, they can also overshoot and create low-quality engagement. The problem of fake engagement is substantially worse if the advertising market rewards engagement quantity. 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
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