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Pricing Network Effects: Competition

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  • Itay P. Fainmesser
  • Andrea Galeotti

Abstract

We study the practice of influencer marketing in oligopoly markets and its effect on market efficiency. In our model, each consumer is influenced by choices of a subset of other consumers. Firms gather information on consumers' influence and price discriminate using this information. In equilibrium, firms charge premia/subsidize below-/above-average-influential consumers; the premia/discounts depend on the strength of network effects and on how much information firms have on consumers' influence. Influencer marketing leads to inefficient consumer-product matches. Firms' investments in information are strategic complements, leading to a race for information acquisition that erodes welfare and firms' profits but increases consumer surplus.

Suggested Citation

  • Itay P. Fainmesser & Andrea Galeotti, 2020. "Pricing Network Effects: Competition," American Economic Journal: Microeconomics, American Economic Association, vol. 12(3), pages 1-32, August.
    • Handle: RePEc:aea:aejmic:v:12:y:2020:i:3:p:1-32
    DOI: 10.1257/mic.20170226
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    1. Itay P. Fainmesser & Andrea Galeotti, 2016. "Pricing Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 165-198.
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    Cited by:

    1. Tavasoli, Ali & Fazli, Mehrdad & Ardjmand, Ehsan & Young, William A. & Shakeri, Heman, 2023. "Competitive pricing under local network effects," European Journal of Operational Research, Elsevier, vol. 311(2), pages 545-566.
    2. Jeon, Doh-Shin & Lefouili, Yassine & Li, Yaxin & Simcoe, Timothy, 2023. "Network Centrality and Device Ecosystems," TSE Working Papers 23-1468, Toulouse School of Economics (TSE), revised Jan 2025.
    3. Goonj Mohan, 2024. "The Data Economy and Polarization on Social Media," UB School of Economics Working Papers 2024/462, University of Barcelona School of Economics.
    4. Ostrizek, Franz & Sartori, Elia, 2023. "Screening while controlling an externality," Games and Economic Behavior, Elsevier, vol. 139(C), pages 26-55.
    5. Duan, Yongrui & Feng, Yixuan, 2021. "Optimal pricing in social networks considering reference price effect," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    6. Robin Ng, 2024. "Free and Open-Source Software: Coordination and Competition," CRC TR 224 Discussion Paper Series crctr224_2024_585, University of Bonn and University of Mannheim, Germany.
    7. Qiang Gong & Yujing Xu & Huanxing Yang, 2024. "Long‐term competition for product awareness with learning from friends," RAND Journal of Economics, RAND Corporation, vol. 55(2), pages 324-355, June.
    8. Kor, Ryan & Zhou, Junjie, 2023. "Multi-activity influence and intervention," Games and Economic Behavior, Elsevier, vol. 137(C), pages 91-115.
    9. Atabek Atayev & Maarten Janssen, 2024. "Information Acquisition And Diffusion In Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 729-753, May.
    10. Arthur Campbell & C. Matthew Leister & Yves Zenou, 2020. "Word‐of‐mouth communication and search," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 676-712, September.
    11. Rui Zheng & Biying Shou & Yingju Chen, 2023. "Differential pricing in social networks with strategic consumers," Production and Operations Management, Production and Operations Management Society, vol. 32(8), pages 2638-2655, August.
    12. Torrent-Sellens, Joan, 2024. "Digital transition, data-and-tasks crowd-based economy, and the shared social progress: Unveiling a new political economy from a European perspective," Technology in Society, Elsevier, vol. 79(C).
    13. Itay P. Fainmesser & Andrea Galeotti & Ruslan Momot, 2023. "Digital Privacy," Management Science, INFORMS, vol. 69(6), pages 3157-3173, June.
    14. Tamás Sebestyén & Balázs Szabó, 2022. "Market interaction structure and equilibrium price heterogeneity in monopolistic competition," Netnomics, Springer, vol. 22(2), pages 259-282, October.
    15. Zenou, Yves & Chen, Ying-Ju & Zhou, Junjie, 2020. "Network Topology and Market Structure," CEPR Discussion Papers 14495, C.E.P.R. Discussion Papers.
    16. Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2022. "The impact of network topology and market structure on pricing," Journal of Economic Theory, Elsevier, vol. 204(C).
    17. Janssen, Maarten & Williams, Cole, 2021. "Influencing Search," CEPR Discussion Papers 15811, C.E.P.R. Discussion Papers.
    18. Ling Liang & Zishu Han & Jiaping Xie & Jialiang Wang & Nan Shi & Weijun Zhu, 2022. "S&T Innovation Platform Sharing Service Contract Mechanism to Achieve Supply Chain Resilience," Sustainability, MDPI, vol. 14(21), pages 1-19, October.
    19. Jiali Huang & Ankur Mani & Zizhuo Wang, 2022. "The Value of Price Discrimination in Large Social Networks," Management Science, INFORMS, vol. 68(6), pages 4454-4477, June.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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