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Consumer Referrals

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  • Maria Arbatskaya
  • Hideo Konishi
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    Abstract

    In many industries, firms reward their customers for making referrals. We analyze the optimal policy mix of price, advertising intensity, and a referral fee for monopoly when buyers choose to what extent to refer other consumers to the firm. We find that the firm advertises less under referrals, but does not change its price from the monopoly level in an attempt to manage consumer referrals. We show that referral programs are Pareto-improving and that the firm underprovides referrals while supporting the socially optimum level of advertising. We extend the analysis to the case where consumer referrals can be targeted.

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    File URL: http://economics.emory.edu/home/assets/workingpapers/arbatskaya_13_10_paper.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 1310.

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    Date of creation: Oct 2013
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    Handle: RePEc:emo:wp2003:1310

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    1. Eyal Biyalogorsky & Eitan Gerstner & Barak Libai, 2001. "Customer Referral Management: Optimal Reward Programs," Marketing Science, INFORMS, vol. 20(1), pages 82-95, August.
    2. Timothy Van Zandt, 2004. "Information Overload in a Network of Targeted Communication," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 542-560, Autumn.
    3. Justin P. Johnson, 2013. "Targeted advertising and advertising avoidance," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 128-144, 03.
    4. Dina Mayzlin, 2006. "Promotional Chat on the Internet," Marketing Science, INFORMS, vol. 25(2), pages 155-163, 03-04.
    5. Simon P. Anderson & André de Palma, 2009. "Information congestion," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 688-709.
    6. Maria Arbatskaya & Hideo Konishi, 2013. "Consumer Referrals," Boston College Working Papers in Economics 851, Boston College Department of Economics.
    7. Jeong-Yoo Kim & Tackseung Jun, 2004. "A theory of consumer referral," Econometric Society 2004 Far Eastern Meetings 488, Econometric Society.
    8. Esteban, Lola & Gil, Agustin & Hernandez, Jose M, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 161-80, June.
    9. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
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