Word-of-Mouth Communication and Percolation in Social Networks
American Economic Review · 2013 · Volume 103 · Issue 6
Abstract
This paper develops a model of demand, pricing and advertising in the presence of social learning via word-of-mouth communication between friends. In the model consumers must receive information about a monopolist's product in order to consider purchasing it. The presence of word-of-mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population. I derive the comparative static results of connectivity, mean-preserving spread of friendships, and clustering of friends on prices. The optimal targets for advertising are not, generically, the individuals with the most friends.
Keywords
Monopoly, Monopolization Strategies, Transactional Relationships, Contracts and Reputation, Networks
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