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Do Online Social Networks Increase Welfare?

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Abstract

We consider a strategic online social network that controls information flows between agents in a social learning setting. Agents on the network select among products of competing firms of unknown quality. The network sells advertising to firms. We consider display advertising, which is standard firm-to-consumer advertising, and social advertising, in which agents who purchased that firm's product are highlighted to their friends. We show that in equilibrium, information is unbiased relative to a setting with no advertising. However, the network reduces the information agents see about others' purchases, since this increases advertising revenue. Hence consumer welfare is lower than in the first-best.

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  • Mueller-Frank, Manuel & M. Pai, Mallesh, 2015. "Do Online Social Networks Increase Welfare?," IESE Research Papers D/1118, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-1118
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    Cited by:

    1. Carlo Reggiani & Alejandro Saporiti & Lois Simanjuntak, 2018. "Social Information and Consumer Heterogeneity," Economics Discussion Paper Series 1813, Economics, The University of Manchester.

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