American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
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