Pricing Network Effects: Competition
American Economic Journal: Microeconomics
vol. 12,
no. 3, August 2020
(pp. 1-32)
Abstract
We study the practice of influencer marketing in oligopoly markets and its effect on market efficiency. In our model, each consumer is influenced by choices of a subset of other consumers. Firms gather information on consumers' influence and price discriminate using this information. In equilibrium, firms charge premia/subsidize below-/above-average-influential consumers; the premia/discounts depend on the strength of network effects and on how much information firms have on consumers' influence. Influencer marketing leads to inefficient consumer-product matches. Firms' investments in information are strategic complements, leading to a race for information acquisition that erodes welfare and firms' profits but increases consumer surplus.Citation
Fainmesser, Itay P., and Andrea Galeotti. 2020. "Pricing Network Effects: Competition." American Economic Journal: Microeconomics, 12 (3): 1-32. DOI: 10.1257/mic.20170226Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D85 Network Formation and Analysis: Theory
- L13 Oligopoly and Other Imperfect Markets
- M31 Marketing
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