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A theory of consumer referral

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  • Jun, Tackseung
  • Kim, Jeong-Yoo

Abstract

In this paper, we consider the network as an alternative communication channel to undirected advertising in the market. The main distinctive feature of the network-embedded transaction is the interdependency of buyers' purchasing behavior. Since most transactions in a network are made sequentially, earlier consumers are more valuable to a seller. We characterize the optimal behavior of a seller and consumers in a network. A seller's strategy of paying referral fees can be understood as a way to price discriminate between more valuable consumers and less valuable ones. Numerical simulations demonstrate that social networks may be either over-utilized (if the referral cost is high) or under-utilized (if the referral cost is low).

Suggested Citation

  • Jun, Tackseung & Kim, Jeong-Yoo, 2008. "A theory of consumer referral," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 662-678, May.
  • Handle: RePEc:eee:indorg:v:26:y:2008:i:3:p:662-678
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    Cited by:

    1. Kim, Beom Jun & Jun, Tackseung & Kim, Jeong-Yoo & Choi, M.Y., 2006. "Network marketing on a small-world network," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 360(2), pages 493-504.
    2. Arbatskaya Maria & Konishi Hideo, 2014. "Managing Consumer Referrals on a Chain Network," Review of Network Economics, De Gruyter, vol. 13(1), pages 69-94, March.
    3. Atabek Atayev & Maarten Janssen, 2021. "Information Acquisition and Diffusion in Markets," Papers 2109.15288, arXiv.org.
    4. Hang-Hyun Jo & Jeoung-Yoo Kim, 2012. "Competitive Targeted Marketing," ISER Discussion Paper 0834, Institute of Social and Economic Research, Osaka University.
    5. Atayev, Atabek & Janssen, Maarten C. W., 2021. "Information acquisition and diffusion in markets," ZEW Discussion Papers 21-091, ZEW - Leibniz Centre for European Economic Research.
    6. Arbatskaya, Maria & Konishi, Hideo, 2016. "Consumer referrals," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 34-58.
    7. Janssen, Maarten & Atayev, Atabek, 2019. "Information Acquisition and Diffusion in Markets," CEPR Discussion Papers 14036, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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