SBEE Lecture Series: Itay Fainmesser
The Social, Behavioral and Experimental Economics lecture series is sponsored by the School of Information, the Ross School of Business and the Department of Economics. Speakers from U.S. and international universities present their research at weekly seminars during the 2017-2018 academic year.
Pricing Network Effects: Competition
This paper studies the practice of influencer marketing in oligopoly markets and its effect on market efficiency. We develop a duopoly model in which firms sell horizontally differentiated products. Consumers are influenced by other consumers’ choices, and some consumers are more influential than others. Firms’ influencer marketing strategy involves discovering the influence of a subset of consumers and price discriminating based on this information.
In equilibrium, firms subsidize consumers whose influence is above average and charge premia to below average influential consumers; the equilibrium premia/discounts depend on the strength of network effects and the level of information that firms have on consumers’ influence. From a normative perspective, we show that influencer marketing leads to inefficient consumer-product matches. Firms’ investments in discovering consumers’ networks are strategic complements, leading to a race for information acquisition that erodes total surplus and firms’ profits but increases consumer surplus.
Itay Fainmesser, PhD (Harvard University) is an Assistant Professor at the Johns Hopkins Carey Business School, and the Economics Department at Johns Hopkins University. Professor Fainmesser studies how social networks affect and are affected by market activities and market rules. His current work explores the optimal pricing of network goods, the role of intermediaries in markets, and the shape and evolution of trust networks.