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Consumer Referrals

Author

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  • Maria Arbatskaya
  • Hideo Konishi

Abstract

In many industries, firms reward their customers for making referrals. We analyze the optimal policy mix of price, advertising intensity, and a referral fee for monopoly when buyers choose to what extent to refer other consumers to the firm. We find that the firm advertises less under referrals, but does not change its price from the monopoly level in an attempt to manage consumer referrals. We show that referral programs are Pareto-improving and that the firm underprovides referrals while supporting the socially optimum level of advertising. We extend the analysis to the case where consumer referrals can be targeted.

Suggested Citation

  • Maria Arbatskaya & Hideo Konishi, 2013. "Consumer Referrals," Emory Economics 1310, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:1310
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    References listed on IDEAS

    as
    1. Arbatskaya, Maria & Konishi, Hideo, 2016. "Consumer referrals," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 34-58.
    2. Eyal Biyalogorsky & Eitan Gerstner & Barak Libai, 2001. "Customer Referral Management: Optimal Reward Programs," Marketing Science, INFORMS, vol. 20(1), pages 82-95, August.
    3. Andrea Galeotti & Sanjeev Goyal, 2009. "Influencing the influencers: a theory of strategic diffusion," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 509-532.
    4. Timothy Van Zandt, 2004. "Information Overload in a Network of Targeted Communication," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 542-560, Autumn.
    5. Jun, Tackseung & Kim, Jeong-Yoo, 2008. "A theory of consumer referral," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 662-678, May.
    6. Justin P. Johnson, 2013. "Targeted advertising and advertising avoidance," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 128-144, March.
    7. Galeotti, Andrea & Moraga-González, José Luis, 2008. "Segmentation, advertising and prices," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1106-1119, September.
    8. Simon P. Anderson & André de Palma, 2009. "Information congestion," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 688-709.
    9. Dina Mayzlin, 2006. "Promotional Chat on the Internet," Marketing Science, INFORMS, vol. 25(2), pages 155-163, 03-04.
    10. 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.
    11. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
    12. Esteban, Lola & Gil, Agustin & Hernandez, Jose M, 2001. "Informative Advertising and Optimal Targeting in a Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 161-180, June.
    13. Maria Arbatskaya & Hideo Konishi, 2013. "A Theory of Consumer Referral: Revisited," Emory Economics 1311, Department of Economics, Emory University (Atlanta).
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    Cited by:

    1. 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.
    2. Arbatskaya, Maria & Konishi, Hideo, 2016. "Consumer referrals," International Journal of Industrial Organization, Elsevier, vol. 48(C), pages 34-58.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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