Recent developments in social media have morphed the age-old practice of paying influential individuals for product endorsements into a multibillion dollar industry, extending well beyond
celebrity sponsorships. We develop a parsimonious model in which influencers trade off the increased revenue they obtain from paid endorsements with the negative impact that these have on
their followers' engagement and, therefore, on the price influencers receive from marketers. The model provides testable predictions that match suggestive evidence on pricing of paid
endorsements, reveals a novel type of inefficiency that emerges in this market, and clarifies the role of search technology and advice transparency in shaping market activity. In particular, we show
that recent policies that make paid endorsements more transparent can backfire, whereas an increase in the effectiveness of the search technology that matches followers to influencers has both
direct and strategic positive welfare effects.
Fainmesser, Itay P., and Andrea Galeotti.
"The Market for Online Influence."
American Economic Journal: Microeconomics,
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Information and Internet Services; Computer Software