Abstract
In this paper, we consider the network as an alternative communication channel to undirected advertising in the market. The main distinctive feature of the network-embedded transaction is the interdependency of buyers' purchasing behavior. Since most transactions in a network are made sequentially, earlier consumers are more valuable to a seller. We characterize the optimal behavior of a seller and consumers in a network. A seller's strategy of paying referral fees can be understood as a way to price discriminate between more valuable consumers and less valuable ones. Numerical simulations demonstrate that social networks may be either over-utilized (if the referral cost is high) or under-utilized (if the referral cost is low).
| Original language | English |
|---|---|
| Pages (from-to) | 662-678 |
| Number of pages | 17 |
| Journal | International Journal of Industrial Organization |
| Volume | 26 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - May 2008 |
Bibliographical note
Funding Information:This research was begun when the second author was visiting SUNY, Albany in 2002. We gratefully acknowledge the helpful comments and suggestions of Mark Armstrong, Editor Simon Anderson, two anonymous referees, seminar participants at Seoul National University, KIAS (Korea Institute for Advanced Study), POSTECH, Osaka University, Hitotsubash University, Hong Kong University of Science and Technology, and audiences at Far Eastern Econometric Society Meeting held in 2004. We are also thankful to Kyung Hee University for financial support.
Copyright:
Copyright 2008 Elsevier B.V., All rights reserved.
Keywords
- Consumer referral
- Network
- Price discrimination
- Referral fee