The Market for Online Influence
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Itay P. Fainmesser
-
Andrea Galeotti
- American Economic Journal: Microeconomics (Forthcoming)
Abstract
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.
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