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Word-of-Mouth Communication and Percolation in Social Networks

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  • Arthur Campbell

Abstract

This paper develops a model of demand, pricing and advertising in the presence of social learning via word-of-mouth communication between friends. In the model consumers must receive information about a monopolist's product in order to consider purchasing it. The presence of word-of-mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population. I derive the comparative static results of connectivity, mean-preserving spread of friendships, and clustering of friends on prices. The optimal targets for advertising are not, generically, the individuals with the most friends.

Suggested Citation

  • Arthur Campbell, 2013. "Word-of-Mouth Communication and Percolation in Social Networks," American Economic Review, American Economic Association, vol. 103(6), pages 2466-2498, October.
    • Handle: RePEc:aea:aecrev:v:103:y:2013:i:6:p:2466-98
    Note: DOI: 10.1257/aer.103.6.2466
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    More about this item

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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