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Word-of-Mouth Communication and Percolation in Social Networks


  • Arthur Campbell


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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    References listed on IDEAS

    1. Ben Vollaard, 2013. "Preventing crime through selective incapacitation," Economic Journal, Royal Economic Society, vol. 123(567), pages 262-284, March.
    2. Alessandro Barbarino & Giovanni Mastrobuoni, 2014. "The Incapacitation Effect of Incarceration: Evidence from Several Italian Collective Pardons," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 1-37, February.
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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Katarzyna Maciejowska & Arkadiusz Jedrzejewski & Anna Kowalska-Pyzalska & Katarzyna Sznajd-Weron & Rafal Weron, 2015. "Two faces of word-of-mouth: Understanding the impact of social interactions on demand curves for innovative products," HSC Research Reports HSC/15/09, Hugo Steinhaus Center, Wroclaw University of Technology.
    2. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    3. repec:eee:gamebe:v:107:y:2018:i:c:p:220-237 is not listed on IDEAS
    4. Paolo Zeppini & Koen Frenken & Luis R. Izquierdo, 2013. "Innovation diffusion in networks: the microeconomics of percolation," Working Papers 13-02, Eindhoven Center for Innovation Studies, revised Feb 2013.
    5. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications, Elsevier.
    6. Caccioli, Fabio & Shrestha, Munik & Moore, Cristopher & Farmer, J. Doyne, 2014. "Stability analysis of financial contagion due to overlapping portfolios," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 233-245.
    7. Goyal, S., 2018. "Heterogeneity and Networks," Cambridge Working Papers in Economics 1812, Faculty of Economics, University of Cambridge.
    8. Sanjeev Goyal, 2015. "Networks in Economics: A Perspective on the Literature," Cambridge Working Papers in Economics 1548, Faculty of Economics, University of Cambridge.
    9. Itay P. Fainmesser & Andrea Galeotti, 2013. "The Value of Network Information," Working Papers 2013-13, Brown University, Department of Economics.
    10. Matthew O. Jackson, 2014. "Networks in the Understanding of Economic Behaviors," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 3-22, Fall.
    11. Shin, Euncheol, 2017. "Monopoly pricing and diffusion of social network goods," Games and Economic Behavior, Elsevier, vol. 102(C), pages 162-178.
    12. Itay P. Fainmesser & Andrea Galeotti, 2013. "The Value of Network Information," Working Papers 2013-13, Brown University, Department of Economics.
    13. repec:eee:gamebe:v:104:y:2017:i:c:p:568-594 is not listed on IDEAS
    14. Antonio Jiménez-Martínez & Óscar González-Guerra, 2016. "Discrimination through "Versioning" with Advertising in Random Networks," Working papers DTE 600, CIDE, División de Economía.
    15. Bar Ifrach & Costis Maglaras & Marco Scarsini, 2011. "Monopoly Pricing in the Presence of Social Learning," Working Papers 11-11, NET Institute, revised Nov 2011.
    16. Nikolas Tsakas, 2014. "Optimal influence under observational learning," Gecomplexity Discussion Paper Series 4, Action IS1104 "The EU in the new complex geography of economic systems: models, tools and policy evaluation", revised Nov 2014.
    17. Leduc, Matt V. & Jackson, Matthew O. & Johari, Ramesh, 2017. "Pricing and referrals in diffusion on networks," Games and Economic Behavior, Elsevier, vol. 104(C), pages 568-594.
    18. Elias Carroni & Simone Righi, 2015. "Pricing in Social Networks under Limited Information," Working Papers 1503, University of Namur, Department of Economics.
    19. Sandro Shelegia & Daniel Garcia, 2015. "Consumer Search with Observational Learning," Vienna Economics Papers 1502, University of Vienna, Department of Economics.
    20. Julian Runge, & Stefan Wagner & Jörg Claussen & Daniel Klapper, 2016. "Freemium pricing: Evidence from a large-scale field experiment," ESMT Research Working Papers ESMT-16-06, ESMT European School of Management and Technology.

    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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