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The Market for Online Influence

Author

Listed:
  • Itay P. Fainmesser
  • Andrea Galeotti

Abstract

Recent developments in social media have morphed the age-old practice of paying influential individuals for product endorsements into a multibillion dollar industry, extending well beyond celebrity sponsorships. We develop a parsimonious model in which influencers trade off the increased revenue they obtain from paid endorsements with the negative impact that these have on their followers' engagement and, therefore, on the price influencers receive from marketers. The model provides testable predictions that match suggestive evidence on pricing of paid endorsements, reveals a novel type of inefficiency that emerges in this market, and clarifies the role of search technology and advice transparency in shaping market activity. In particular, we show that recent policies that make paid endorsements more transparent can backfire, whereas an increase in the effectiveness of the search technology that matches followers to influencers has both direct and strategic positive welfare effects.

Suggested Citation

  • Itay P. Fainmesser & Andrea Galeotti, 2021. "The Market for Online Influence," American Economic Journal: Microeconomics, American Economic Association, vol. 13(4), pages 332-372, November.
    • Handle: RePEc:aea:aejmic:v:13:y:2021:i:4:p:332-72
    DOI: 10.1257/mic.20200050
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    Citations

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    Cited by:

    1. Ron Berman & Aniko Oery & Xudong Zheng, 2023. "Influence or Advertise: The Role of Social Learning in Influencer Marketing," Cowles Foundation Discussion Papers 2358, Cowles Foundation for Research in Economics, Yale University.
    2. Daniel Ershov & Yanting, He & Stephan Seiler, 2023. "How Much Influencer Marketing Is Undisclosed? Evidence from Twitter," CESifo Working Paper Series 10743, CESifo.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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