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A Theory of Strategic Diffusion

  • Sanjeev Goyal

    (University of Cambridge)

  • Andrea Galeotti

    (University of Essex)

The important role of friends, neighbors and colleagues in shaping individual choices has been brought out in a number of studies over the years. The presence of significant ‘local’ influence in shaping individual behavior suggests that firms, governments and developmental agencies should explicitly incorporate it in the design of their marketing and developmental strategies. This paper develops a framework for the study of optimal strategies in the presence of social interaction. We focus on the case of a single player who exerts costly effort to get a set of individuals – engaged in social interaction – to choose a certain action. Our formulation allows for different types of social interaction (ranging from sharing of information to direct adoption externalities) and also allows for the player to have incomplete information concerning the connections among individuals. The analysis starts by showing that incorporating information on social interaction can have large effects on the profits of a player. We then show that an increase in the level and dispersion of social interaction can raise or lower the optimal strategy and profits of the player, depending on the content of the interaction. We then study the value of social network information for the player and find that it depends on the dispersion in social connections. The economic interest of these results is illustrated via a discussion of two economic applications: advertising in the presence of word of mouth communication and seeding a network.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.70.

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Date of creation: Jun 2007
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Handle: RePEc:fem:femwpa:2007.70
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  1. Coralio Ballester & Antoni Calvo-Armengol & Yves Zenou, 2005. "Who's Who in Networks. Wanted: the Key Player," NajEcon Working Paper Reviews 666156000000000586, www.najecon.org.
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  3. Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
  5. Andrea Galeotti & Sanjeev Goyal & Matthew O. Jackson & Fernando Vega-Redondo & Leeat Yariv, 2010. "Network Games," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 218-244.
  6. Mark Rosenzweig & Andrew D. Foster, . "Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture," Home Pages _068, University of Pennsylvania.
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  8. Arun Sundararajan, 2004. "Local Network Effects and Network Structure," Industrial Organization 0412011, EconWPA.
  9. Ellison, Glenn & Fudenberg, Drew, 1992. "Rules of Thumb for Social Learning," IDEI Working Papers 17, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. A. Banerjee & Drew Fudenberg, 2010. "Word-of-Mouth Communication and Social Learning," Levine's Working Paper Archive 425, David K. Levine.
  11. Matthew O. Jackson & Brian W. Rogers, 2007. "Meeting Strangers and Friends of Friends: How Random Are Social Networks?," American Economic Review, American Economic Association, vol. 97(3), pages 890-915, June.
  12. Banerji, A & Dutta, Bhaskar, 2005. "Local Network Externalities and Market Segmentation," The Warwick Economics Research Paper Series (TWERPS) 725, University of Warwick, Department of Economics.
  13. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  14. NAVARRO, Noemí, 2006. "Asymmetric information, word-of-mouth and social networks: from the market for lemons to efficiency," CORE Discussion Papers 2006002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Reingen, Peter H, et al, 1984. " Brand Congruence in Interpersonal Relations: A Social Network Analysis," Journal of Consumer Research, University of Chicago Press, vol. 11(3), pages 771-83, December.
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