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American Economic Review: Vol. 103 No. 6 (October 2013)

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Word-of-Mouth Communication and Percolation in Social Networks

Article Citation

Campbell, Arthur. 2013. "Word-of-Mouth Communication and Percolation in Social Networks." American Economic Review, 103(6): 2466-98.

DOI: 10.1257/aer.103.6.2466

Abstract

This paper develops a model of demand, pricing and advertising in the presence of social learning via word-of-mouth communication between friends. In the model consumers must receive information about a monopolist's product in order to consider purchasing it. The presence of word-of-mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population. I derive the comparative static results of connectivity, mean-preserving spread of friendships, and clustering of friends on prices. The optimal targets for advertising are not, generically, the individuals with the most friends.

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Authors

Campbell, Arthur (Yale U)

JEL Classifications

L12: Monopoly; Monopolization Strategies
L14: Transactional Relationships; Contracts and Reputation; Networks


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