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Externalities, Social Value and Word of Mouth: Notions of Public Economics on Networks

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  • Pier-Andre Bouchard St-Amant

    () (Queen s University)

Abstract

I examine an environment where advertisers can "seed" word-of-mouth advertising by providing initial information about a product to specific users of a social network. Discussion over a social network generates spillover effects for firms when consumers can use the social network to inform each other about products. When a firm can exploit a social network's structure, it can increase its sales. However, when the network formation process is costly, firms free-ride on such costs at the expense of agents on the network. If agents can form coalitions, I show that they can recoup the value of this externality by charging a toll. When users actively modify the information, generating word-of-mouth advertising about a product provides a "social value." This social value stems from the discussions that agents have about the product, without any intervention. Since this process occurs regardless of the firm's actions, the firm cannot capture such valuation. The opinion leaders, or highly regarded agents on the network, play a key role in the formation of this social value.

Suggested Citation

  • Pier-Andre Bouchard St-Amant, 2013. "Externalities, Social Value and Word of Mouth: Notions of Public Economics on Networks," Working Papers 1301, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1301
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1301.pdf
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    References listed on IDEAS

    as
    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. Ting Liu & Pasquale Schiraldi, 2012. "New product launch: herd seeking or herd preventing?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 627-648, November.
    3. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
    4. Vettas, Nikolaos, 1997. "On the Informational Role of Quantities: Durable Goods and Consumers' Word-of-Mouth Communication," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 915-944, November.
    5. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    6. Galeotti, Andrea & Ghiglino, Christian & Squintani, Francesco, 2009. "Strategic Information Transmission in Networks," Economics Discussion Papers 2974, University of Essex, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Network; Word of Mouth; Externalities; Social Value;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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