Marketing via Friends: Strategic Diffusion of Information in Social Networks with Homophily
AbstractThe paper studies the impact of homophily on the optimal strategies of a monopolist, whose marketing campaign of new product relies on a word of mouth communication. Homophily is a tendency of people to interact more with those who are similar to them. In the model there are two types of consumers embedded into a social network, which differ in friendship preferences and desirable design of product. Consumers can learn about the product directly from an advertisement or from their neighbors. The monopolist chooses the product design and price to influence a pattern of communication among consumers. We find a number of results: (i) for low levels of homophily the product attractive to both types of consumers is preferred to specialized products; (ii) the price elasticity is increasing in homophily; (iii) an increase in the homophily benefits both the monopolist and consumers; and (iv) the product attractive to both types may be optimal even if the monopolist obtains profits only from sales to one type of consumers.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.118.
Date of creation: Sep 2010
Date of revision:
Networks; Word of Mouth; Viral Marketing; Homophily; Diffusion; Social Networks; Random Graphs; Monopoly; Pricing Strategy; Product Design; Marketing; Advertisement;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D60 - Microeconomics - - Welfare Economics - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-06 (All new papers)
- NEP-MKT-2010-11-06 (Marketing)
- NEP-NET-2010-11-06 (Network Economics)
- NEP-SOC-2010-11-06 (Social Norms & Social Capital)
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