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Do Online Social Networks Increase Welfare?

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Abstract

We consider a strategic online social network that controls information flows between agents in a social learning setting. Agents on the network select among products of competing firms of unknown quality. The network sells advertising to firms. We consider display advertising, which is standard firm-to-consumer advertising, and social advertising, in which agents who purchased that firm's product are highlighted to their friends. We show that in equilibrium, information is unbiased relative to a setting with no advertising. However, the network reduces the information agents see about others' purchases, since this increases advertising revenue. Hence consumer welfare is lower than in the first-best.

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  • Mueller-Frank, Manuel & M. Pai, Mallesh, 2015. "Do Online Social Networks Increase Welfare?," IESE Research Papers D/1118, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-1118
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    1. Alexandre Cornière & Greg Taylor, 2014. "Integration and search engine bias," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 576-597, September.
    2. Itay P. Fainmesser & Andrea Galeotti, 2013. "The Value of Network Information," Working Papers 2013-13, Brown University, Department of Economics.
    3. Itay P. Fainmesser & Andrea Galeotti, 2013. "The Value of Network Information," Working Papers 2013-13, Brown University, Department of Economics.
    4. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    5. Dirk Bergemann & Alessandro Bonatti, 2011. "Targeting in advertising markets: implications for offline versus online media," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 417-443, September.
    6. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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    Keywords

    social networks; advertising; search;

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